With the move to a flexible exchange rate system in 1973, nominal exchange rate volatility has
exhibited remarkable persistence. In this paper, we adopt the FIGARCH model introduced by Baillie
et al. (1996) to describe exchange rate volatility dynamics. Overall, the FIGARCH model is better
equipped to capture the salient features of exchange rate volatility than are the commonly used
GARCH and IGARCH models. And perhaps more important, the FIGARCH model generates superior
out-of-sample volatility forecasts, and the gains in forecast accuracy are substantial.