ABSTRACT
In previous chapters we have discussed the factors that are likely to affect the determination of the exchange rate and the effects of changes in the exchange rate on the economy, and we have reviewed the turbulent history of exchange rates in recent years. The exchange rate is clearly important, both to countries and to individuals, yet the ability of economists and others to forecast it has not been impressive. Publicly available forecasts of the economy are always careful to stress the uncertainty about future developments; one highly respected international organisation, the OECD, always presents its forecasts on the assumption of fixed rates of exchange; governments themselves refuse to publish their own forecasts of exchange rates and interest rates for fear of market reaction. In this chapter we review the methods that have been employed by those involved in preparing publicly available forecasts of the UK economy, as well as less formal methods sometimes used in financial institutions. Although some of the approaches are statistical, we will not get involved in complicated econometric discussions; instead we will explain why forecasters have adopted a particular course of action and what are its likely weaknesses.
