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What Drives Heterogeneity in Foreign Exchange Rate Expectations: Deep Insights from a New Survey

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  • Christian Dreger
  • Georg Stadtmann

Abstract

Foreign exchange rate expectations play a central role in virtually all monetary models for the open economy. Therefore, it is extremely important to gain empirical insights into the expectations formation process. In this paper, we use a unique disaggregated data set to model the expectations of the Yen/USD exchange rate of about 50 leading foreign exchange rate professionals. The survey includes not only forecasts of the exchange rate, but also for macroeconomic fundamentals, like GDP growth, inflation, and interest rates. Different expectations of fundamentals might lead to different views of exchange rate dynamics. Using panel models, we are able to confirm the heterogeneity of exchange rate expectations often detected by former authors. More important, we provide strong evidence regarding the likely source of heterogeneity. In line with forward looking models for the exchange rate, expected fundamentals have a substantial impact on exchange rate expectations, thereby challenging the backward looking evidence of previous studies. However, the heterogeneity in the expectations of macroeconomic fundamentals is not sufficient to explain the heterogeneity in exchange rate expectations.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44708.de/dp624.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 624.

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Length: 14 p.
Date of creation: 2006
Date of revision:
Publication status: Published in: International Journal of Finance and Economics 13 (2008), Iss. 4, 360-367
Handle: RePEc:diw:diwwpp:dp624

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Keywords: Exchange rate expectations; heterogeneity of expectations; expected fundamentals;

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References

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Cited by:
  1. Pierdzioch, Christian & Rülke, Jan-Christoph & Stadtmann, Georg, 2012. "A note on forecasting emerging market exchange rates: Evidence of anti-herding," Discussion Papers 324, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
  2. Dick, Christian D. & MacDonald, Ronald & Menkhoff, Lukas, 2011. "Individual exchange rate forecasts and expected fundamentals," ZEW Discussion Papers 11-062, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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