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"Too few free variables"

How much can exchange-rates be explained by interest-rate mismatches?

If this is 'nonzero', how can exchange-rates balance trade-flows?

Hi Jon,

I have a little toy statistical model which I use to 'predict' the value of the Canadian dollar:

http://economics.about.com/od/exchangeratesbycountry/a/mert_predictor.htm

MERT value = 48.26 + Price Of Oil * 0.621 + Interest Rate Gap * 1.83

Where the Interest Gap = CDN Overnight Rate - US Federal Funds Rate.

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There's no real theory behind this at all - it is a black box. But it seems to work pretty well.

I have a little toy statistical model which I use to 'predict' the value of the Canadian dollar

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