Direct Versus Indirect Forecasting of the Defined Real Exchange Rate of South Africa

The real exchange rate of South Africa can be forecasted using the direct or the indirect methods of forecasting. This article compares the forecasting results of direct and indirect forecasting of the real exchange rate by using two univariate models and a multivariate model. The direct models outperformed the indirect models in-sample and the indirect models generally outperformed the direct models out-of-sample. Given the closeness of the forecasting results, the modeller should decide whether it is worth the effort to forecast the real exchange rate indirectly if similar results can be obtained from a (less time-consuming) direct method.