Empirical exchange rate models of the seventies

Meese, Richard; Rogoff, Kenneth

doi:10.1016/0022-1996(83)90017-x

Cited by 3,230 publications

(1,172 citation statements)

References 27 publications

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“…that the empirical literature provides strong evidence for the unit root behavior of shortrun exchange rates (Meese and Rogoff, 1983). Thus, for modeling short-run dynamics of foreign exchange rates this seems to be a sensible approximation.…”

Section: Market Maker's Pricing Behaviormentioning

confidence: 96%

Exchange Rate Dynamics in a Target Zone - A Heterogeneous Expectations Approach

Bauer

Reitz

2008

SSRN Journal

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The target zone model of Krugman (1991) has failed empirically. In this paper, we develop a model of the exchange rate with heterogeneous agents in a free floating and a target zone regime. We show that this simple model mimics the empirical puzzles of exchange rates: excessive volatility, fat tails, volatility clustering, and disconnection from the fundamentals. In addition, the target zone regime replicates a reduced nominal volatility for the same level of fundamental volatility as in the free floating regime and the distribution of the exchange rate within the band is hump-shaped.JEL Code: F31, F41.

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Section: Market Maker's Pricing Behaviormentioning

confidence: 96%

Exchange Rate Dynamics in a Target Zone - A Heterogeneous Expectations Approach

Bauer

Reitz

2008

SSRN Journal

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“…Subsequent to the devastating result of Meese and Rogoff (1983), which showed the failure of exchange rate models in an out-of-sample forecasting context in comparison to a random walk model, the linkage of exchange rates to fundamentals has now been demonstrated to hold at very short and at the long horizon: at very short-term horizons, exchange rates clearly and systematically react to fundamentals, as many event studies have examined in detail (e.g., Andersen, Bollerslev, Diebold, and Vega, 2003), while at long-term horizons, exchange rates are attracted to the purchasing power parity level and, related to this, seem to be tentatively in line with the 4 monetary model (e.g., Mark, 1995;Taylor and Taylor, 2004). Thus, it is the medium-term horizon where it is most difficult to show a clear relationship between fundamentals and exchange rates (Rogoff, 2007).…”

Section: Literaturementioning

confidence: 99%

“…Finally, market participants do not only use fundamentals but also non-fundamentals as information in their decision making (Menkhoff and Taylor, 2007). Each of these sources of complexity may explain why conventional tests of exchange rate models in the spirit of Meese and Rogoff (1983) -regressing exchange rate changes on changes in fundamentals -fail (Cheung, Chinn, and Pascual, 2005): the reason is not necessarily the above mentioned "disconnect" but possibly the use of a "false" model, i.e. a model that cannot account well enough for existing complex 1 relations.…”

Section: Introductionmentioning

confidence: 99%

Individual Exchange Rate Forecasts and Expected Fundamentals

2011

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:http://ftp.zew.de/pub/zew-docs/dp/dp11062.pdf Non-technical SummaryExchange rates are one of the most important prices in open economies. Despite their great importance for many enterprises, surprisingly little is known about the economic factors influencing the ups and downs of exchange rates at intermediate horizons. Although several theoretical macroeconomic models do identify potential determinants of exchange rates, empirical studies since the mid-1980s have found that these models do not make more accurate medium-term forecasts than random forecasts. This empirical finding has led to the conclusion that exchange rates and fundamentals are unrelated in the medium term. However, the complexity of currency markets (with heterogeneous market participants or time-variant influencing factors) could conceal a potential relation between economic fundamentals and exchange rates.The present study takes an indirect approach to investigating whether exchange rates are formed based on fundamentals. The defining idea behind our study is to analyze individual forecasts without making assumptions regarding the forecaster's macroeconomic models. Instead, we judge individual forecasts by their forecast ability only. We assume that good exchange rate forecasts are generally based on better information, and analyze whether this information is macroeconomic. To this end, we take a look at the forecast ability of individual forecasts for the USD/EUR exchange rate in conjunction with the forecast ability of associated short-term interest rate forecasts.We view the significant, positive relationship between good exchange rate forecasts (on a one-month horizon) and good interest rate forecast as evidence that exchange rate forecasts benefit from a better interpretation of the macroeconomic reality. This requires a fundamental linkage between exchange rates and macroeconomic variables.If this linkage exists, it should vary in its importance across different market phases. Our further analyses indeed indicate that a correlation between exchange rates and interest rates is especially important when there is an obvious fundamental misalignment between the respective countries. This is the case when there is a great difference between exchange rates and their fundamental values (based on purchasing power parity), when interest rate differences between the two currencies are large, and when exchange rates do not exhibit a strong tren...

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“…Under the catch phrase 'disconnect puzzle' many caveats to a fundamental based determination of exchange rates are summarized. First, Messe and Rogoff (1983) have shown that fundamental exchange rate models perform less accurately than forecasts that do not rely on macroeconomic fundamentals at all. This holds true even under the assumption that market participants perfectly anticipate the future path of macroeconomic fundamentals.…”

Section: A Criticism Of the Underlying Exchange Rate Modelsmentioning

confidence: 99%

Sterilized Foreign Exchange Market Interventions in a Chartist-Fundamentalist Exchange Rate Model

Schmidt

Wollmershäuser

2004

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractSterilized foreign exchange market interventions are commonly dismissed by economists as an ineffective policy instrument. Nevertheless many central banks operating under independently floating exchange rates regimes are often engaged in sales and purchases of foreign exchange in order to manipulate the current value of their currencies. In this paper we argue that the skepticism of many economists can be ascribed to their orientation on fundamental-based, efficient-market exchange rate models. Given their weak empirical support, however, it is unreasonable to evaluate the effectiveness of sterilized foreign exchange interventions against the background of this class of models. Therefore, the purpose of this paper is to investigate the effectiveness of sterilized foreign exchange market interventions on the basis of a more suitable model. Using a chartist-fundamentalist model we show that central banks can influence exchange rates by using sterilized interventions. In particular, turning points occur earlier and exchange rate misalignments are substantially reduced.

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Empirical exchange rate models of the seventies

Cited by 3,230 publications

References 27 publications

Exchange Rate Dynamics in a Target Zone - A Heterogeneous Expectations Approach

Exchange Rate Dynamics in a Target Zone - A Heterogeneous Expectations Approach

Individual Exchange Rate Forecasts and Expected Fundamentals

Sterilized Foreign Exchange Market Interventions in a Chartist-Fundamentalist Exchange Rate Model

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