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Short-run and Long-run Expectations of the Yen/Dollar Exchange Rate

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  • Takatoshi Ito

Abstract

The survey data on the yen/dollar exchange rate, collected twice a month for eight years from 1985 to 1993, shows the following features. First, the expected exchange rate changes in the short horizon (one month) are of the band-wagon type while the expected changes in the long horizon (three to six months) are of the mean- reversion type. That is, foreign exchange traders infer from recent appreciations or depreciation that the recent change in the exchange rate will continue for a while, but the direction of changes will reverse, eventually. Second, this result is robust for the entire sample period, which includes sub-periods of sharp yen appreciations and of relative calm, and with respect to different specifications. Third, the deviation from an equilibrium exchange rate does not yield a robust estimate in the regression of expectation formation. Although the history of the yen/dollar exchange rate fluctuations in the past two decades shows mean reversion over several years, they are not captured in the six-month expectations in the survey data.

Suggested Citation

  • Takatoshi Ito, 1993. "Short-run and Long-run Expectations of the Yen/Dollar Exchange Rate," NBER Working Papers 4545, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4545
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    1. Froot, Kenneth A. & Ito, Takatoshi, 1989. "On the consistency of short-run and long-run exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 8(4), pages 487-510, December.
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    Cited by:

    1. Georges Prat & Remzi Uctum, 2015. "Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data," Applied Economics, Taylor & Francis Journals, vol. 47(34-35), pages 3673-3695, July.
    2. Jeffrey Frankel., 1995. "How Well Do Foreign Exchange Markets Function: Might a Tobin Tax Help?," Center for International and Development Economics Research (CIDER) Working Papers C95-058, University of California at Berkeley.
    3. MacDonald, Ronald & Nagayasu, Jun, 1998. "On the Japanese Yen-U.S. Dollar Exchange Rate: A Structural Econometric Model Based on Real Interest Differentials," Journal of the Japanese and International Economies, Elsevier, vol. 12(1), pages 75-102, March.
    4. Ron Jongen & Willem F.C. Verschoor & Christian C.P. Wolff, 2008. "Foreign Exchange Rate Expectations: Survey And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 140-165, February.
    5. Ronald MacDonald & Jun Nagayasu, 2013. "Currency forecast errors at times of low interest rates: evidence from survey data on the Yen/Dollar exchange rate," Working Papers 1321, University of Strathclyde Business School, Department of Economics.
    6. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    7. Georges Prat & Remzi Uctum, 2014. "Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data," Working Papers hal-04141348, HAL.
    8. Lukas Menkhoff & Rafael Rebitzky & Michael Schroder, 2008. "Do dollar forecasters believe too much in PPP?," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 261-270.
    9. Rotheli, Tobias F., 2002. "Bandwagon effects and run patterns in exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(2), pages 157-166, April.
    10. Carl Bonham & Richard Cohen & Shigeyuki Abe, 2006. "The Rationality and Heterogeneity of Survey Forecasts of the Yen-Dollar Exchange Rate: A Reexamination," Working Papers 200611, University of Hawaii at Manoa, Department of Economics.
    11. MacDonald, Ronald & Nagayasu, Jun, 2015. "Currency forecast errors and carry trades at times of low interest rates: Evidence from survey data on the yen/dollar exchange rate," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 1-19.
    12. Pollock, Andrew C. & Wilkie, Mary E., 1996. "The quality of bank forecasts: The dollar-pound exchange rate, 1990-1993," European Journal of Operational Research, Elsevier, vol. 91(2), pages 306-314, June.
    13. Pierdzioch, Christian, 2002. "Exchange Rate Expectations Redux and Monetary Policy," Kiel Working Papers 1109, Kiel Institute for the World Economy (IfW Kiel).
    14. Pippenger, John, 2004. "In search of overshooting and bandwagons in exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(1), pages 87-98, February.
    15. Imane El Ouadghiri, 2015. "Heterogeneity in Macroeconomic News Expectations: A disaggregate level analysis," EconomiX Working Papers 2015-17, University of Paris Nanterre, EconomiX.
    16. Imane El Ouadghiri, 2015. "Heterogeneity in Macroeconomic News Expectations: A disaggregate level analysis," Working Papers hal-04141409, HAL.

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