Explain the forecast error, ut+1, in terms of: (1 ) Its equation (what it is equal to) (2 ) How it is used (3 ) Its accuracy
What will be an ideal response?
(Et+1 - Et)/Et - ( - Et)/Et this equation represents actual minus expected depreciation, where ut+1 is the forecast error made in predicting future depreciation.
Under interest parity the equation ((Et+1 - Et)/Et - (Rt - Rt ) would also be correct, this equation represents the actual currency depreciation minus the interest difference
Statistical methods have been used to see if the forecast error is predictable through the use of past information. Indeed, a number of researchers have found that ut+1 CAN be predicted.
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