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

  • Ito Takatoshi

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.

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File URL: http://www.sciencedirect.com/science/article/B6WMC-45NSH74-M/2/bd3bfcd2e05a53945e3bf1aed5a11837
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Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 8 (1994)
Issue (Month): 2 (June)
Pages: 119-143

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Handle: RePEc:eee:jjieco:v:8:y:1994:i:2:p:119-143
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622903

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  1. Kenneth A. Froot & Takatoshi Ito, 1988. "On the Consistency of Short-run and Long-run Exchange Rate Expectations," NBER Working Papers 2577, National Bureau of Economic Research, Inc.
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