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Exchange rate forecasts and expected fundamentals

Author

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  • Dick, Christian D.
  • MacDonald, Ronald
  • Menkhoff, Lukas

Abstract

Using a large panel of individual professionals' forecasts, this paper demonstrates that good exchange rate forecasts are related to a proper understanding of fundamentals, specifically good interest rate forecasts. This relationship is robust to individual fixed effects and further controls. Reassuringly, the relationship is stronger during phases when the impact from fundamentals is more obvious, e.g., when exchange rates substantially deviate from their PPP values. Finally, forecasters largely agree that an interest rate increase relates to a currency appreciation, but only good forecasters get expected interest rates right.

Suggested Citation

  • Dick, Christian D. & MacDonald, Ronald & Menkhoff, Lukas, 2014. "Exchange rate forecasts and expected fundamentals," Kiel Working Papers 1974, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkwp:1974
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    More about this item

    Keywords

    Exchange Rate Determination; Individual Expectations; Macroeconomic Fundamentals;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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