Exchange Rate Dynamics, Learning and Misperception
AbstractWe propose a new explanation for the forward-premium and the delayed-overshooting puzzles. Both puzzles arise from a systematic under-reaction of short-term interest rate forecasts to current innovations. Accordingly, the forward premium is always a biased predictor of future depreciation; the bias can be so severe as to lead to negative coefficients in the ‘Fama’ regression; delayed overshooting may or may not occur depending upon the persistence of interest rate innovations and the degree of under-reaction; lastly, for G-7 countries against the US, these puzzles can be rationalized for values of the model's parameters that match empirical estimates.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3725.
Date of creation: Jan 2003
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Other versions of this item:
- Pierre-Olivier Gourinchas & Aaron Tornell, 2002. "Exchange Rate Dynamics, Learning and Misperception," NBER Working Papers 9391, National Bureau of Economic Research, Inc.
- Pierre-Olivier Gourinchas & Aaron Tornell, 2000. "Exchange Rate Dynamics, Learning and Misperception," Econometric Society World Congress 2000 Contributed Papers 0795, Econometric Society.
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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