True or False?
True! The movement of the real exchange rate between period t-1 and period t is under the random-walk assumption is given by
qt − qt-1 = εt
It changes by εt , which is just as likely to be positive as negative and will on average be zero. Since εt is zero on average, we can expect that on average the real exchange rate will not change between this period and next. We will nearly always guess wrong, of course, but our prediction will be just as likely to be too high as too low. Economists have devoted much research effort to developing forecasting models of the exchange rate. They have found that in general one cannot improve on the naive forecast that tomorrow's exchange rate will be where today's is.