TY  - JOUR
AU  - Frankel,Jeffrey A.
AU  - Rose,Andrew K.
TI  - A Survey of Empirical Research on Nominal Exchange Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4865
PY  - 1994
Y2  - September 1994
UR  - http://www.nber.org/papers/w4865
L1  - http://www.nber.org/papers/w4865.pdf
N1  - Author contact info:
Jeffrey A. Frankel
Kennedy School of Government
Harvard University
79 JFK Street
Cambridge, MA 02138
Tel: 617/496-3834
Fax: 617/496-5747
E-Mail: jeffrey_frankel@harvard.edu

Andrew K. Rose
Haas School of Business Administration
University of California, Berkeley
Berkeley, CA 94720-1900
Tel: 510/642-6609
Fax: 510/642-4700
E-Mail: arose@haas.berkeley.edu
AB  - We survey the empirical literature on floating nominal exchange rates over the past decade.  Exchange rates are difficult to forecast at short- to medium-term horizons.  There is a bit of explanatory power to monetary models such as the Dornbusch 'overshooting' theory, in the form of reaction to 'news' and in forecasts at long-run horizons.  Nevertheless, at short horizons, a driftless random walk characterizes exchange rates better than standard models based on observable macroeconomic fundamentals.  Unexplained large shocks to floating rates must then, logically, be due either to innovations in unobservable fundamentals, or to non-fundamental factors such as speculative bubbles.  The observed difference in exchange rate and macroeconomic volatility under different nominal exchange rate regimes makes us skeptical of the first view.  The theory and evidence on speculative bubbles, however, is not conclusive.  We conclude with the hope that promising new studies of the microstructure of the foreign exchange market might eventually rise to insights into these phenomena.
ER  -