The Influence Of Fundamentals On Exchange Rates: Findings From Analyses Of News Effects

As we survey the literature of macroeconomic news in the foreign exchange market, we can by now look back on nearly 30 years of research. The first studies which analysed news effects on exchange rates were established in the early 1990s (see, for example, Dornbusch). Almost at the same time Meese and Rogoff published their influential paper, revealing the forecasting inferiority in exchange rates of structural models against the random walk. This finding has shocked the pillars of exchange rate economics and thus cast general suspicion on research focusing on fundamentals in this field. The eventual rising popularity of event studies can partly be attributed to the re‐establishment of the raison d’être of exchange rate economics. This work focuses on systematically surveying this literature with particular respect to its primary goal, i.e. shedding light on the analytical value of fundamental research. Thus, its major findings are, first, fundamental news does matter, whereas non‐fundamental news matters to a lesser degree. Second, news influences exchange rates via two separated channels, i.e. incorporating common information into prices directly or indirectly based upon order flow. Third, with a few exceptions the impact of fundamental news on exchange rates is fairly stable over time.