NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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):   ITI   IFM

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

This paper is available as PDF (436 K) or via email.

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:
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
Krugman w1926 Pricing to Market when the Exchange Rate Changes
Mussa The Theory of Exchange Rate Determination
Engel, Mark, and West w13318 Exchange Rate Models Are Not as Bad as You Think
 
Publications
Activities
Meetings
Data
People
About

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

Contact Us