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Exchange rates and fundamentals under adaptive learning

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  • Kim, Young Se
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    Abstract

    This paper studies a monetary model that is standard in all respects except that market participants have incomplete knowledge about the economic structure and employ adaptive learning rules to learn about the economic environment. Market participants also must contend with unannounced regime shifts. Simulation results suggest that the models under adaptive learning, especially constant-gain learning combined with a structural change, dominate the alternative specifications of expectations in their ability to account for why fundamentals predict exchange-rate returns over long horizons but not over short horizons, and for generating excessively volatile returns and persistent deviations of the exchange rate from the monetary fundamentals.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 33 (2009)
    Issue (Month): 4 (April)
    Pages: 843-863

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    Handle: RePEc:eee:dyncon:v:33:y:2009:i:4:p:843-863

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Exchange rates Learning Expectations Structural break;

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    Cited by:
    1. Agnieszka Markiewicz, 2010. "Monetary Policy, Model Uncertainty and Exchange Rate Volatility," CESifo Working Paper Series 2949, CESifo Group Munich.
    2. Peter H. Sullivan, 2013. "Finding a Connection Between Exchange Rates and Fundamentals, How Should We Model Revisions to Forecasting Strategies?," 2013 Papers psu387, Job Market Papers.
    3. Apergis, Nicholas & Zestos, George K. & Shaltayev, Dmitriy S., 2012. "Do market fundamentals determine the Dollar–Euro exchange rate?," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 1-15.
    4. V. Lewis & A. Markiewicz, 2009. "Model Misspecification, Learning and the Exchange Rate Disconnect Puzzle," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/563, Ghent University, Faculty of Economics and Business Administration.

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