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Short-run and Long-run Expectations of the Yen/Dollar Exchange Rate

  • Takatoshi Ito

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4545.

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Date of creation: Nov 1993
Date of revision:
Publication status: published as Journal of the Japanese and International Economies, vol. 8, no. 2, June 1994, pp. 119-143.
Handle: RePEc:nbr:nberwo:4545
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  1. 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.
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