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On the consistency of short-run and long-run exchange rate expectations

  • Froot, Kenneth A.
  • Ito, Takatoshi

This paper examines whether short-term exchange rate expectations move "too much" by comparing them with long-term expectations. We develop a set of nonlinear restrictions linking expectations at different forecast horizons. The restrictions impose consistency, a property weaker than rationality. We use ex- change rate survey data to measure expectations and then test whether consistency holds. The data show that a current, positive exchange rate shock leads agents to expect a higher long-run future spot rate when iterating forward their short-term expectations than when thinking directly about the long run. In this sense short-horizon expectations may overreact to current exchange rate changes.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 8 (1989)
Issue (Month): 4 (December)
Pages: 487-510

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Handle: RePEc:eee:jimfin:v:8:y:1989:i:4:p:487-510
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
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