Estimating Exchange Rate Equations Using Estimated Expectations
AbstractThis paper takes a somewhat different approach from the recent literature in estimating exchange rate equations. It assumes uncovered interest rate parity and models how expectations are formed. Agents are assumed to base their expectations of future interest rates and prices, which are needed in the determination of the exchange rate, on predictions from a ten equation VAR model. The overall model is estimated by FIML under model consistent expectations. The model generally does better than the random walk model, and its properties are consistent with observed effects on exchange rates from surprise interest rate and price announcements. Also, the focus on expectations is consistent with the large observed short run variability of exchange rates.
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1635.
Length: 28 pages
Date of creation: Jan 2008
Date of revision:
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Other versions of this item:
- Fair, Ray C., 2008. "Estimating Exchange Rate Equations Using Estimated Expectations," Working Papers 33, Yale University, Department of Economics.
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-12 (All new papers)
- NEP-CBA-2008-01-12 (Central Banking)
- NEP-IFN-2008-01-12 (International Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Philippe Bacchetta & Eric van Wincoop, 2003.
"Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?,"
03.02, Swiss National Bank, Study Center Gerzensee.
- Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June.
- Eric van Wincoop & Philippe Bacchetta, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," NBER Working Papers 9498, National Bureau of Economic Research, Inc.
- Bacchetta, Philippe & van Wincoop, Eric, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," CEPR Discussion Papers 3808, C.E.P.R. Discussion Papers.
- Eric van Wincoop & Philippe Bacchetta, 2004. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," Econometric Society 2004 North American Winter Meetings 628, Econometric Society.
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