Long Swings in the Exchange Rate: Are they in the Data and Do Markets Know It?

Charles Engel, James D. Hamilton

NBER Working Paper No. 3165
Issued in November 1989
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

The value of the dollar appears to move in one direction for long periods of time. We develop a new statistical model of exchange rate dynamics as a sequence of stochastic, segmented time trends. The paper implements new techniques for parameter estimation and hypothesis testing for this framework. We reject the null hypothesis that exchange rates follow a random walk in favor of our model of long swings. Our model also generates better forecasts than a random walk. We conclude that persistent movement in the value of the dollar is a fact that calls for greater attention in the theory of exchange rate behavior. The model is a natural framework for assessing the importance of the "peso problem" for the dollar. It allows for the expectation of future exchange rates to be influenced by the probability of a change in regime. We nonetheless reject uncovered interest parity. The forward premium appears frequently to put too high a probability on a change in regime.

download in pdf format
   (436 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3165

Published: "Long Swings in the Dollar: Are they in the Data and Do Markets Know It?" American Economic Review, Volume 80, September 1990, 689-713

Users who downloaded this paper also downloaded* these:
Meese and Rogoff The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?
Obstfeld and Rogoff w4693 Exchange Rate Dynamics Redux
Frankel and Froot w3470 Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market
Rogoff and Stavrakeva w14071 The Continuing Puzzle of Short Horizon Exchange Rate Forecasting
Reinhart and Rogoff w8963 The Modern History of Exchange Rate Arrangements: A Reinterpretation
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us