Long Swings in the Exchange Rate: Are they in the Data and Do Markets Know It? / Charles Engel, James D. Hamilton.

Format:

Book

Author/Creator:

Engel, Charles.

Contributor:

National Bureau of Economic Research.

Hamilton, James D.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3165.

NBER working paper series no. w3165

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Long Swings in the Exchange Rate

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1989.

Summary:

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.

Notes:

Print version record

November 1989.