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Exchange-rate discounting

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  • Smith, Gregor W.

Abstract

Economists often describe nominal exchange rates as forward-looking, so that they reflect discounted, expected, future fundamentals. This study applies a method for identifying the discount rate involved, without knowing or measuring fundamentals. Identification arises from assumptions on the stochastic process followed by fundamentals, combined with nonlinearity arising from expected future regime changes. Two applications yield evidence against the present-value model in the form of discount rates which are negative and statistically significant.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 14 (1995)
Issue (Month): 5 (October)
Pages: 659-666

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Handle: RePEc:eee:jimfin:v:14:y:1995:i:5:p:659-666

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Web page: http://www.elsevier.com/locate/inca/30443

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  1. Smith, Gregor W & Smith, R Todd, 1990. "Stochastic Process Switching and the Return to Gold, 1925," Economic Journal, Royal Economic Society, vol. 100(399), pages 164-75, March.
  2. Officer, Lawrence H., 1985. "Integration in the American Foreign-Exchange Market, 1791–1900," The Journal of Economic History, Cambridge University Press, vol. 45(03), pages 557-585, September.
  3. Smith, Gregor W, 1991. "Solution to a Problem of Stochastic Process Switching," Econometrica, Econometric Society, vol. 59(1), pages 237-39, January.
  4. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977 Elsevier.
  5. Gregor W. Smith & R. Todd Smith, 1996. "Greenback-Gold Returns and Expectations of Resumption, 1862-1879," Working Papers 1255, Queen's University, Department of Economics.
  6. Miller, Marcus & Sutherland, Alan, 1994. "Speculative Anticipations of Sterling's Return to Gold: Was Keynes Wrong?," Economic Journal, Royal Economic Society, vol. 104(425), pages 804-12, July.
  7. Francis X. Diebold & James M. Nason, 1989. "Nonparametric exchange rate prediction?," Finance and Economics Discussion Series 81, Board of Governors of the Federal Reserve System (U.S.).
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