Short-Run and Long-Run Expectationss of the Yen/Dollar Exchange Rate
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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- 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.
- Froot, Kenneth A. & Ito, Takatoshi, 1989. "On the consistency of short-run and long-run exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 8(4), pages 487-510, December.
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