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Exchange-Rate Discounting

  • Gregor W. Smith

    ()

    (Queen's University)

Economists often describe nominal exchange rates as forward-looking, so that they reflect discounted, expected, future fundamentals. This study applies a method for identifying the discount rate involved, without knowing or measuring fundamentals. Identification arises from assumptions on the stochastic process followed by fundamentals, combined with nonlinearity arising from expected future regime changes. Two applications yield evidence against the present-value model in the form of discount rates which are negative and statistically significant.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1248.pdf
File Function: First version 1995
Download Restriction: no

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1248.

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Length: 11 pages
Date of creation: Jul 1995
Date of revision:
Publication status: forthcoming in the Journal of International Money and Finance
Handle: RePEc:qed:wpaper:1248
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Web page: http://qed.econ.queensu.ca/
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  1. Smith, Gregor W & Smith, R Todd, 1990. "Stochastic Process Switching and the Return to Gold, 1925," Economic Journal, Royal Economic Society, vol. 100(399), pages 164-75, March.
  2. Gregor W. Smith & R. Todd Smith, 1996. "Greenback-Gold Returns and Expectations of Resumption, 1862-1879," Working Papers 1255, Queen's University, Department of Economics.
  3. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977 Elsevier.
  4. Miller, Marcus & Sutherland, Alan, 1994. "Speculative Anticipations of Sterling's Return to Gold: Was Keynes Wrong?," Economic Journal, Royal Economic Society, vol. 104(425), pages 804-12, July.
  5. Francis X. Diebold & James M. Nason, 1989. "Nonparametric exchange rate prediction?," Finance and Economics Discussion Series 81, Board of Governors of the Federal Reserve System (U.S.).
  6. Smith, Gregor W, 1991. "Solution to a Problem of Stochastic Process Switching," Econometrica, Econometric Society, vol. 59(1), pages 237-39, January.
  7. Officer, Lawrence H., 1985. "Integration in the American Foreign-Exchange Market, 1791–1900," The Journal of Economic History, Cambridge University Press, vol. 45(03), pages 557-585, September.
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