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Detecting Scapegoat Effects In The Relationship Between Exchange Rates And Macroeconomic Fundamentals: A New Approach

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  • Pozzi, Lorenzo
  • Sadaba, Barbara

Abstract

This paper presents a new testing method for the scapegoat model of exchange rates. A number of steps are implemented to determine whether macro-fundamentals are scapegoats for the evolution of exchange rates. Estimation is conducted using a Bayesian Gibbs sampling approach applied to eight countries (five developed and three emerging) versus the USA over the period 2002Q1–2014Q4. The macro-fundamentals that we consider are real GDP growth, the inflation rate, the long-run nominal interest rate, and the current account to GDP ratio. We calculate the posterior probabilities that these macro-fundamentals are scapegoats. For the inflation rate, these probabilities are considerably higher than the imposed prior probabilities of ½ in five out of eight countries (in particular, the Anglo-Saxon economies).

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  • Pozzi, Lorenzo & Sadaba, Barbara, 2020. "Detecting Scapegoat Effects In The Relationship Between Exchange Rates And Macroeconomic Fundamentals: A New Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 24(4), pages 951-994, June.
  • Handle: RePEc:cup:macdyn:v:24:y:2020:i:4:p:951-994_8
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    Cited by:

    1. Eric Hillebrand & Jakob Guldbæk Mikkelsen & Lars Spreng & Giovanni Urga, 2023. "Exchange rates and macroeconomic fundamentals: Evidence of instabilities from time‐varying factor loadings," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(6), pages 857-877, September.
    2. Eric Hillebrand & Jakob Mikkelsen & Lars Spreng & Giovanni Urga, 2020. "Exchange Rates and Macroeconomic Fundamentals: Evidence of Instabilities from Time-Varying Factor Loadings," CREATES Research Papers 2020-19, Department of Economics and Business Economics, Aarhus University.

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