Long Swings in the Exchange Rate: Are they in the Data and Do Markets Know It?
NBER Working Paper No. 3165
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.
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: