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Are experts' expectations rational? A multicurrency analysis

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  • Swarna Dutt
  • Dipak Ghosh

Abstract

Is the exchange rate expectation formation process rational? This age old question is looked at with survey data on exchange rate expectations at multiple forecast horizons. This helps to circumvent the risk premium issue and isolate the exchange rate expectational rationality factor. The econometric procedure used is the Phillips-Hansen fully modified ordinary least squares test. This allows one to conduct an unrestricted cointegration analysis and also differentiate between strong and weak forms of rationality. To do this separate tests are made of the bivariate (two currencies) and the multivariate (multicurrency) systems approach. Rationality in the exchange rate expectation formation process is not upheld in either the weak or strong form test, at any forecast horizon.

Suggested Citation

  • Swarna Dutt & Dipak Ghosh, 1997. "Are experts' expectations rational? A multicurrency analysis," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 803-812.
    • Handle: RePEc:taf:applec:v:29:y:1997:i:6:p:803-812
    DOI: 10.1080/000368497326723
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    References listed on IDEAS

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    2. Resende, Marcelo & Zeidan, Rodrigo M., 2008. "Expectations and chaotic dynamics: Empirical evidence on exchange rates," Economics Letters, Elsevier, vol. 99(1), pages 33-35, April.
    3. Anastasiou, Dimitrios, 2020. "Senior bank loan officers' expectations for loan demand: Evidence from the Euro-area," MPRA Paper 98903, University Library of Munich, Germany.
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