Theoretical advantages and drawbacks of fundamental exchange rate forecasting models

The main fundamental models for nominal exchange rate forecasting are discussed in this article. After presenting purchasing power parity, interest rate parity, Mundell-Fleming, flexible price and sticky price monetary, portfolio balance and microstructure models, the main drawbacks and advantages of these models are presented. The authors conclude, that exchange rate forecasting field still requires more studies, because so far the most promising microstructure approach has serious drawbacks which might affect the validity of the model, moreover, there is no clear theoretical classification of fundamental and alternative models.