IDEAS home Printed from https://ideas.repec.org/p/ssa/lemwps/2015-24.html
   My bibliography  Save this paper

Social Learning and Higher Order Beliefs: A Structural Model of Exchange Rates Dynamics

Author

Listed:
  • Francesca Pancotto
  • Giuseppe Pignataro
  • Davide Raggi

Abstract

This paper proposes a structural model of exchange rates where agents formulate their one-step ahead predictions based on social learning process and higher order beliefs. Individual choices are then aggregated and plugged into a rather standard macroeconomic model to derive the dynamics of exchange rates. Bayesian estimation of the structural parameters is implemented exploiting Foreign exchange Consensus Survey data of heterogeneous forecasts and fundamentals. Results show that higher order beliefs accounts for a large part of the total value, while public information play the most important role in determining individual expectations. Although the precision of the private signal is larger than the public one, information publicly revealed does exert a disproportionate in uence, and dierences in the estimated signals determine the equilibrium strategy of each agent as a combination between personal beliefs and higher order expectations.

Suggested Citation

  • Francesca Pancotto & Giuseppe Pignataro & Davide Raggi, 2015. "Social Learning and Higher Order Beliefs: A Structural Model of Exchange Rates Dynamics," LEM Papers Series 2015/24, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  • Handle: RePEc:ssa:lemwps:2015/24
    as

    Download full text from publisher

    File URL: http://www.lem.sssup.it/WPLem/files/2015-24.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ottaviani, Marco & Sorensen, Peter Norman, 2006. "The strategy of professional forecasting," Journal of Financial Economics, Elsevier, vol. 81(2), pages 441-466, August.
    2. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," American Economic Review, American Economic Association, vol. 94(2), pages 91-98, May.
    3. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
    4. Kenneth A. Froot & Tarun Ramadorai, 2005. "Currency Returns, Intrinsic Value, and Institutional‐Investor Flows," Journal of Finance, American Finance Association, vol. 60(3), pages 1535-1566, June.
    5. Charles Engel & Kenneth D. West, 2005. "Exchange Rates and Fundamentals," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 485-517, June.
    6. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116-159.
    7. George-Marios Angeletos & Jennifer La'O, 2010. "Noisy Business Cycles," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 319-378, National Bureau of Economic Research, Inc.
    8. Elliott, Graham & Ito, Takatoshi, 1999. "Heterogeneous expectations and tests of efficiency in the yen/dollar forward exchange rate market," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 435-456, April.
    9. Fratzscher, Marcel & Rime, Dagfinn & Sarno, Lucio & Zinna, Gabriele, 2015. "The scapegoat theory of exchange rates: the first tests," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 1-21.
    10. Del Negro, Marco & Eusepi, Stefano, 2011. "Fitting observed inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2105-2131.
    11. Benassy-Quere, Agnes & Larribeau, Sophie & MacDonald, Ronald, 2003. "Models of exchange rate expectations: how much heterogeneity?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(2), pages 113-136, April.
    12. Payne, Richard, 2003. "Informed trade in spot foreign exchange markets: an empirical investigation," Journal of International Economics, Elsevier, vol. 61(2), pages 307-329, December.
    13. Christian Hellwig & Laura Veldkamp, 2009. "Knowing What Others Know: Coordination Motives in Information Acquisition," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 223-251.
    14. Tommaso Proietti, 2006. "Temporal disaggregation by state space methods: Dynamic regression methods revisited," Econometrics Journal, Royal Economic Society, vol. 9(3), pages 357-372, November.
    15. Ito, Takatoshi, 1990. "Foreign Exchange Rate Expectations: Micro Survey Data," American Economic Review, American Economic Association, vol. 80(3), pages 434-449, June.
    16. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 793-821.
    17. Philippe Bacchetta & Eric Van Wincoop, 2004. "A Scapegoat Model of Exchange-Rate Fluctuations," American Economic Review, American Economic Association, vol. 94(2), pages 114-118, May.
    18. 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.
    19. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
    20. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    21. Michael R. King & Carol Osler & Dagfinn Rime, 2011. "Foreign exchange market structure, players and evolution," Working Paper 2011/10, Norges Bank.
    22. Joseph Engelberg & Charles F. Manski & Jared Williams, 2011. "Assessing the temporal variation of macroeconomic forecasts by a panel of changing composition," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(7), pages 1059-1078, November.
    23. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    24. George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, vol. 75(4), pages 1103-1142, July.
    25. Siem Jan Koopman & Neil Shephard & Jurgen A. Doornik, 1999. "Statistical algorithms for models in state space using SsfPack 2.2," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 107-160.
    26. Chionis, Dionysios & MacDonald, Ronald, 1997. "Some tests of market microstructure hypotheses in the foreign exchange market," Journal of Multinational Financial Management, Elsevier, vol. 7(3), pages 203-229, October.
    27. Vives, Xavier, 1997. "Learning from Others: A Welfare Analysis," Games and Economic Behavior, Elsevier, vol. 20(2), pages 177-200, August.
    28. Ron Jongen & Willem F.C. Verschoor & Christian C.P. Wolff, 2008. "Foreign Exchange Rate Expectations: Survey And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 140-165, February.
    29. Luca Colombo & Gianluca Femminis & Alessandro Pavan, 2014. "Information Acquisition and Welfare," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1438-1483.
    30. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
    31. Andolfatto, David & Hendry, Scott & Moran, Kevin, 2008. "Are inflation expectations rational?," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 406-422, March.
    32. Cavaglia, Stefano & Verschoor, Willem F. C. & Wolff, Christian C. P., 1993. "Further evidence on exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 78-98, February.
    33. Charles Bellemare & Charles F. Manski, 2011. "Introduction: ‘Measurement and analysis of subjective expectations’," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(3), pages 351-351, April.
    34. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    35. Mitchell, Karlyn & Pearce, Douglas K., 2007. "Professional forecasts of interest rates and exchange rates: Evidence from the Wall Street Journal's panel of economists," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 840-854, December.
    36. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-1085, September.
    37. Avraham, David & Ungar, Meyer & Zilberfarb, Ben-Zion, 1987. "Are foreign exchange forecasts rational? : An empirical note," Economics Letters, Elsevier, vol. 24(3), pages 291-293.
    38. Dominguez, Kathryn M., 1986. "Are foreign exchange forecasts rational? : New evidence from survey data," Economics Letters, Elsevier, vol. 21(3), pages 277-281.
    39. Golinelli, Roberto & Parigi, Giuseppe, 2008. "Real-time squared: A real-time data set for real-time GDP forecasting," International Journal of Forecasting, Elsevier, vol. 24(3), pages 368-385.
    40. Jongen, Ron & Verschoor, Willem F.C. & Wolff, Christian C.P. & Zwinkels, Remco C.J., 2012. "Explaining dispersion in foreign exchange expectations: A heterogeneous agent approach," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 719-735.
    41. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    42. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    43. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
    44. Chinn, Menzie & Frankel, Jeffrey, 1994. "Patterns in Exchange Rate Forecasts for Twenty-five Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 759-770, November.
    45. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
    46. Myatt, David P. & Wallace, Chris, 2014. "Central bank communication design in a Lucas-Phelps economy," Journal of Monetary Economics, Elsevier, vol. 63(C), pages 64-79.
    47. Macdonald, Ronald & Marsh, Ian W., 1996. "Currency forecasters are heterogeneous: confirmation and consequences," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 665-685, October.
    48. Mark, Nelson C, 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, American Economic Association, vol. 85(1), pages 201-218, March.
    49. Myatt, David P. & Wallace, Chris, 2015. "Cournot competition and the social value of information," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 466-506.
    50. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
    51. Branch, William A., 2007. "Sticky information and model uncertainty in survey data on inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 245-276, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. F. Pancotto & G. Pignataro & D. Raggi, 2014. "Higher order beliefs and the dynamics of exchange rates," Working Papers wp957, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.
    3. Ince, Onur & Molodtsova, Tanya, 2017. "Rationality and forecasting accuracy of exchange rate expectations: Evidence from survey-based forecasts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 131-151.
    4. 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.
    5. Beckmann, Joscha & Czudaj, Robert, 2017. "Exchange rate expectations since the financial crisis: Performance evaluation and the role of monetary policy and safe haven," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 283-300.
    6. Dick, Christian D. & MacDonald, Ronald & Menkhoff, Lukas, 2015. "Exchange rate forecasts and expected fundamentals," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 235-256.
    7. Mäkinen, Taneli & Ohl, Björn, 2015. "Information acquisition and learning from prices over the business cycle," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 585-633.
    8. Beckmann, Joscha & Czudaj, Robert, 2017. "The impact of uncertainty on professional exchange rate forecasts," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 296-316.
    9. Ron Jongen & Willem F.C. Verschoor & Christian C.P. Wolff, 2008. "Foreign Exchange Rate Expectations: Survey And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 140-165, February.
    10. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-2084, December.
    11. Myatt, David P. & Wallace, Chris, 2019. "Information acquisition and use by networked players," Journal of Economic Theory, Elsevier, vol. 182(C), pages 360-401.
    12. Kunze, Frederik, 2017. "Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts," Center for European, Governance and Economic Development Research Discussion Papers 326, University of Goettingen, Department of Economics.
    13. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.
    14. Beckmann, Joscha & Reitz, Stefan, 2020. "Information rigidities and exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 105(C).
    15. Beckmann, Joscha & Czudaj, Robert L., 2020. "Fundamental determinants of exchange rate expectations," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224617, Verein für Socialpolitik / German Economic Association.
    16. Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2010. "Exchange rate forecasting, order flow and macroeconomic information," Journal of International Economics, Elsevier, vol. 80(1), pages 72-88, January.
    17. Alexandre Kohlhas, 2018. "Asymmetric Attention," 2018 Meeting Papers 1040, Society for Economic Dynamics.
    18. Juan Jose Echavarria & Mauricio Villamizar-Villegas, 2016. "Great expectations? evidence from Colombia’s exchange rate survey," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 25(1), pages 1-27, December.
    19. Leonardo Melosi, 2017. "Signalling Effects of Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 853-884.
    20. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ssa:lemwps:2015/24. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/labssit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/labssit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.