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The scapegoat theory of exchange rates: the first tests

Listed author(s):
  • Fratzscher, Marcel
  • Rime, Dagfinn
  • Sarno, Lucio
  • Zinna, Gabriele

The scapegoat theory of exchange rates (Bacchetta and van Wincoop, 2004, 2013) suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as “scapegoats”to rationalize observed currency fluctuations at times when exchange rates are driven by unobservable shocks. Using novel survey data that directly measure foreign exchange scapegoats for 12 exchange rates, we find empirical evidence that supports the scapegoat theory. The resulting models explain a large fraction of the variation and directional changes in exchange rates in sample, although their out-of-sample forecasting performance is mixed.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304393214001354
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 70 (2015)
Issue (Month): C ()
Pages: 1-21

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Handle: RePEc:eee:moneco:v:70:y:2015:i:c:p:1-21
DOI: 10.1016/j.jmoneco.2014.09.001
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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