TY - JOUR
AU - Engel,Charles
AU - Hamilton,James D.
TI - Long Swings in the Exchange Rate: Are they in the Data and Do Markets Know It?
JF - National Bureau of Economic Research Working Paper Series
VL - No. 3165
PY - 1989
Y2 - November 1989
DO - 10.3386/w3165
UR - http://www.nber.org/papers/w3165
L1 - http://www.nber.org/papers/w3165.pdf
N1 - Author contact info:
Charles Engel
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI 53706-1393
Tel: 608/262-3697
Fax: 608/262-2033
E-Mail: cengel@ssc.wisc.edu
James D. Hamilton
Department of Economics, 0508
University of California, San Diego
9500 Gilman Drive
La Jolla, CA 92093-0508
Tel: 858/534-5986
Fax: 858/534-7040
E-Mail: jhamilton@ucsd.edu
AB - 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.
ER -