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Individual exchange rate forecasts and expected fundamentals

Author

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

Abstract

This paper suggests that exchange rates are related to economic fundamentals over medium-term horizons, such as a month or longer. We find from a large panel of individual professionals' forecasts that good exchange rate forecasts benefit from the proper understanding of fundamentals, specifically good interest rate forecasts. This relation is robust to individual fixed effects and further controls. Reassuringly, this relation is stronger during obvious fundamental misalignment. This occurs when exchange rates substantially deviate from their PPP values, when interest rate differentials are high and when exchange rates are less influenced by strong momentum.

Suggested Citation

  • Dick, Christian D. & MacDonald, Ronald & Menkhoff, Lukas, 2011. "Individual exchange rate forecasts and expected fundamentals," ZEW Discussion Papers 11-062, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:11062
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    References listed on IDEAS

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    Cited by:

    1. Dick, Christian D. & Menkhoff, Lukas, 2013. "Exchange rate expectations of chartists and fundamentalists," Journal of Economic Dynamics and Control, Elsevier, vol. 37(7), pages 1362-1383.

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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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