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Exchange Rate Dynamics, Learning and Misperception

Author

Listed:
  • Pierre-Olivier Gourinchas

    (Princeton University)

  • Aaron Tornell

    (UCLA and NBER)

Abstract

We propose a new explanation for the forward-premium and the delayed-overshooting puzzles. Both puzzles arise from a systematic under-reaction of short-term interest rate forecasts to current innovations. Accordingly, the forward premium is always a biased predictor of future depreciation; the bias can be so severe as to lead to negative coefficients in the ?Fama? regression; delayed overshooting may or may not occur depending upon the persistence of interest rate innovations and the degree of under-reaction; lastly, for G-7 countries against the US, these puzzles can be rationalized for values of the model's parameters that match empirical estimates.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Pierre-Olivier Gourinchas & Aaron Tornell, 2000. "Exchange Rate Dynamics, Learning and Misperception," Econometric Society World Congress 2000 Contributed Papers 0795, Econometric Society.
    • Handle: RePEc:ecm:wc2000:0795
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    Cited by:

    1. is not listed on IDEAS
    2. Juan J. Echavarría & Luis F. Melo-Velandia & Mauricio Villamizar-Villegas, 2018. "The impact of pre-announced day-to-day interventions on the Colombian exchange rate," Empirical Economics, Springer, vol. 55(3), pages 1319-1336, November.
    3. Emine Boz, 2006. "Can Miracles Lead to Crises? An Informational Frictions Explanation of Emerging Markets Crises," Computing in Economics and Finance 2006 19, Society for Computational Economics.
    4. Mr. Jacques A Miniane, 2004. "Productivity Shocks, Learning, and Open Economy Dynamics," IMF Working Papers 2004/088, International Monetary Fund.
    5. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June.
    6. Derviz, Alexis, 2004. "Asset return dynamics and the FX risk premium in a decentralized dealer market," European Economic Review, Elsevier, vol. 48(4), pages 747-784, August.
    7. Andersen, Torben M. & Beier, Niels C., 2005. "International transmission of transitory and persistent monetary shocks under imperfect information," Journal of International Economics, Elsevier, vol. 66(2), pages 485-507, July.
    8. Scholl, Almuth & Uhlig, Harald, 2008. "New evidence on the puzzles: Results from agnostic identification on monetary policy and exchange rates," Journal of International Economics, Elsevier, vol. 76(1), pages 1-13, September.
    9. Mikael Bask, 2003. "Technical Trading at the Currency Market Increases the Overshooting Effect," Finnish Economic Papers, Finnish Economic Association, vol. 16(2), pages 72-80, Autumn.
    10. Kenneth West, 2003. "Monetary policy and the volatility of real exchange rates in New Zealand," New Zealand Economic Papers, Taylor & Francis Journals, vol. 37(2), pages 175-196.
    11. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    12. Rehim Kılıç, 2023. "Uncovered interest rate, overshooting, and predictability reversal puzzles in an emerging economy," Finance and Economics Discussion Series 2023-074, Board of Governors of the Federal Reserve System (U.S.).
    13. Pierre-Olivier Gourinchas & Helene Rey, 2005. "International financial adjustment," Proceedings, Federal Reserve Bank of San Francisco.
    14. Martin Schneider & Monika Piazzesi, 2008. "Bond Positions, Expectations, and the Yield Curve," 2008 Meeting Papers 268, Society for Economic Dynamics.
    15. Gourinchas, Pierre-Olivier & Tornell, Aaron, 2004. "Exchange rate puzzles and distorted beliefs," Journal of International Economics, Elsevier, vol. 64(2), pages 303-333, December.
    16. Emine Boz, 2009. "Can Miracles Lead to Crises? The Role of Optimism in Emerging Markets Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1189-1215, September.
    17. Divino, Jose Angelo, 2009. "Optimal monetary policy for a small open economy," Economic Modelling, Elsevier, vol. 26(2), pages 352-358, March.
    18. Guerrazzi, Marco, 2012. "On involuntary unemployment: notes on efficiency-wage competition," MPRA Paper 38140, University Library of Munich, Germany.
    19. Aaron Tornell, 2000. "Robust-H-infinity Forecasting and Asset Pricing Anomalies," NBER Working Papers 7753, National Bureau of Economic Research, Inc.
    20. Jonathan Kearns, 2007. "Commodity Currencies: Why Are Exchange Rate Futures Biased if Commodity Futures Are Not?," The Economic Record, The Economic Society of Australia, vol. 83(260), pages 60-73, March.
    21. Jan Brùha & Alexis Derviz, 2006. "Macroeconomic Factors and the Balanced Value of the Czech Koruna/Euro Exchange Rate (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 56(7-8), pages 318-343, July.
    22. Aaron Tornell, 2003. "Exchange Rate Puzzles and Distorted Beleifs (June 2003), with Pierre-Olivier Gourinchas," UCLA Economics Online Papers 265, UCLA Department of Economics.
    23. repec:hum:wpaper:sfb649dp2005-037 is not listed on IDEAS

    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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