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 coeffcients in the 'Fama' 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 U.S., these puzzles can be rationalized for values of the model's parameters that match empirical estimates
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9391.
Date of creation: Dec 2002
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Other versions of this item:
- Pierre-Olivier Gourinchas & Aaron Tornell, 2000. "Exchange Rate Dynamics, Learning and Misperception," Econometric Society World Congress 2000 Contributed Papers 0795, Econometric Society.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-12-17 (All new papers)
- NEP-FIN-2002-12-17 (Finance)
- NEP-IFN-2002-12-17 (International Finance)
- NEP-RMG-2002-12-17 (Risk Management)
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