@techreport{NBERw3165,
title = "Long Swings in the Exchange Rate: Are they in the Data and Do Markets Know It?",
author = "Charles Engel and James D. Hamilton",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "3165",
year = "1989",
month = "November",
doi = {10.3386/w3165},
URL = "http://www.nber.org/papers/w3165",
abstract = {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.},
}