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Floating Exchange Rates, Expectations and New Information

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  • Sebastian Edwards

Abstract

This paper analyzes the relationship between forward exchange rates,future spot rates and new information. A stochastic model of exchangerate determination is used to formally show how unanticipated changes in the exchange rate determinants (or "news") affect the spot rate. The empirical analysis indicates that "new information" plays an important role in explaining the market forecasting error, or difference between the spot rate and the forward rate, determined in the previous period.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1064.

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Date of creation: Jan 1983
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Publication status: published as Edwards, Sebastian Edwards. "Floating Exchange Rates, Expectations and New Information." Journal of Monetary Economics, Vol. 11, No. 3. (May 1983), pp . 321-336.
Handle: RePEc:nbr:nberwo:1064

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  1. Hans Genberg, 1981. "Effects of Central Bank Intervention in the Foreign Exchange Market (Effets de l'intervention de la banque centrale dans les marchés des changes) (Efectos de la intervención de los bancos centra," IMF Staff Papers, Palgrave Macmillan, vol. 28(3), pages 451-476, September.
  2. Frenkel, Jacob A & Mussa, Michael L, 1980. "The Efficiency of Foreign Exchange Markets and Measures of Turbulence," American Economic Review, American Economic Association, American Economic Association, vol. 70(2), pages 374-81, May.
  3. Levi, Maurice D, 1977. "Taxation and "Abnormal" International Capital Flows," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 635-46, June.
  4. Cumby, Robert E. & Huizinga, John & Obstfeld, Maurice, 1983. "Two-step two-stage least squares estimation in models with rational expectations," Journal of Econometrics, Elsevier, Elsevier, vol. 21(3), pages 333-355, April.
  5. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 78(2), pages 229-48.
  6. Jacob A. Frenkel & Michael L. Mussa, 1980. "Efficiency of Foreign Exchange Markets and Measures of Turbulence," NBER Working Papers 0476, National Bureau of Economic Research, Inc.
  7. Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 13(2), pages 266-76, June.
  8. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(5), pages 829-53, October.
  9. Driskill, Robert, 1981. "Exchange rate overshooting, the trade balance, and rational expectations," Journal of International Economics, Elsevier, Elsevier, vol. 11(3), pages 361-377, August.
  10. Frenkel, Jacob A. & Razin, Assaf, 1980. "Stochastic prices and tests of efficiency of foreign exchange markets," Economics Letters, Elsevier, Elsevier, vol. 6(2), pages 165-170.
  11. Dooley, Michael P & Isard, Peter, 1980. "Capital Controls, Political Risk, and Deviations from Interest-Rate Parity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(2), pages 370-84, April.
  12. John F. O. Bilson, 1980. "The "Speculative Efficiency" Hypothesis," NBER Working Papers 0474, National Bureau of Economic Research, Inc.
  13. Frenkel, Jacob A. & Aizenman, Joshua, 1982. "Aspects of the optimal management of exchange rates," Journal of International Economics, Elsevier, Elsevier, vol. 13(3-4), pages 231-256, November.
  14. Richard Meese & Kenneth Rogoff, 1981. "Empirical exchange rate models of the seventies: are any fit to survive?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 184, Board of Governors of the Federal Reserve System (U.S.).
  15. Roll, Richard & Solnik, Bruno, 1979. "On some parity conditions encountered frequently in international economics," Journal of Macroeconomics, Elsevier, Elsevier, vol. 1(3), pages 267-283.
  16. R. Dornbusch, 1975. "The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 165, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Saidi, Nasser H, 1980. "Fluctuating Exchange Rates and the International Transmission of Economic Disturbances," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 12(4), pages 575-91, November.
  18. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 1045-55, December.
  19. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 78(2), pages 200-224.
  20. Barro, Robert J, 1978. "A Stochastic Equilibrium Model of an Open Economy under Flexible Exchange Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 92(1), pages 149-64, February.
  21. Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(6), pages 1451-59, Nov.-Dec..
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Citations

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Cited by:
  1. Cavaglia, Stefano M. F. G. & Wolff, Christian C. P., 1996. "A note on the determinants of unexpected exchange rate movements," Journal of Banking & Finance, Elsevier, Elsevier, vol. 20(1), pages 179-188, January.
  2. W A Razzak, 1998. "The forward rate unbiasedness hypothesis in inflation-targeting regimes," Reserve Bank of New Zealand Discussion Paper Series G99/3, Reserve Bank of New Zealand, revised Aug 1999.
  3. Robert Amano & Paul Fenton & David Tessier & Simon van Norden, 1996. "The credibility of monetary policy: a survey of the literature with some simple applications to Caanda," Meeting papers, EconWPA 9610001, EconWPA.
  4. Tanner, Glenn, 1997. "A note on economic news and intraday exchange rates," Journal of Banking & Finance, Elsevier, Elsevier, vol. 21(4), pages 573-585, April.
  5. Takatoshi Ito & V. Vance Roley, 1986. "News from the U. S. and Japan: Which Moves the Yen/Dollar Exchange Rate?," NBER Working Papers 1853, National Bureau of Economic Research, Inc.
  6. C. Ennew, & N. Kellard, & P. Newbold, A. J. Rayner & M. E. Wohar,, . "Two Puzzles in the Analysis of Foreign Exchange Market Efficiency," Discussion Papers, University of Nottingham, School of Economics 96/18, University of Nottingham, School of Economics.
  7. Luintel, K. B. & Paudyal, K., 1998. "Common stochastic trends between forward and spot exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(2), pages 279-297, April.
  8. Gregory P. Hopper, 1997. "What determines the exchange rate: economic factors or market sentiment?," Business Review, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, issue Sep, pages 17-29.
  9. Luis Felipe Lagos & Rodrigo Cerda, 2006. "Tipo de Cambio Nominal en un Régimen de Flotación: Chile 2000-2005," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 313, Instituto de Economia. Pontificia Universidad Católica de Chile..
  10. Kevin Ross, 1991. "Contemporaneous Reserve Accounting, M1 Announcements and Exchange Rate Movements," Eastern Economic Journal, Eastern Economic Association, Eastern Economic Association, vol. 17(2), pages 177-187, Apr-Jun.
  11. Sebastián Edwards, 1983. "La Relación entre las Tasas de Interés y el Tipo de Cambio Bajo un Sistema de Cambio Flotante," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 20(59), pages 65-74.
  12. Guneratne Banda Wickremasinghe, 2004. "Efficiency of the Foreign Exchange Market of Papua New Guinea During the Recent Float," International Trade, EconWPA 0406007, EconWPA.

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