Out-of-Sample Performance of the Macroeconomic Balance Approach to the Real Exchange Rate in Sub-Saharan Africa

This paper tests the performance of the macroeconomic balance (MB) approach (or fundamental equilibrium exchange rate approach) in predicting future movements of real exchange rates (RERs) and current accounts. The analysis is conducted for countries in Sub-Saharan Africa (SSA). Econometric evidence shows that a random walk beats current account and RER misalignments from the MB approach in out-of-sample forecasting accuracy. However, the MB approach helps to predict the direction of change of these variables.