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The scapegoat theory of exchange rates: the first tests

Listed author(s):
  • Marcel Fratzscher

    ()

    (DIW Berlin and Humboldt University)

  • Dagfinn Rime

    ()

    (BI Norwegian Business School)

  • Lucio Sarno

    ()

    (Cass Business School)

  • Gabriele Zinna

    ()

    (Bank of Italy)

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.bancaditalia.it/pubblicazioni/temi-discussione/2014/2014-0991/en_tema_991.pdf?language_id=1
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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 991.

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Date of creation: Oct 2014
Handle: RePEc:bdi:wptemi:td_991_14
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