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 âFamaâ 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 Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0795.
Date of creation: 01 Aug 2000
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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.
- Gourinchas, Pierre-Olivier & Tornell, Aaron, 2003. "Exchange Rate Dynamics, Learning and Misperception," CEPR Discussion Papers 3725, C.E.P.R. Discussion Papers.
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- F31 - International Economics - - International Finance - - - Foreign Exchange
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