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The scapegoat theory of exchange rates: the first tests

Author

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  • Fratzscher, Marcel
  • Rime, Dagfinn
  • Sarno, Lucio
  • Zinna, Gabriele

Abstract

The scapegoat theory of exchange rates (Bacchetta and van Wincoop, 2004, 2013) suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as “scapegoats”to rationalize observed currency fluctuations at times when exchange rates are driven by unobservable shocks. Using novel survey data that directly measure foreign exchange scapegoats for 12 exchange rates, we find empirical evidence that supports the scapegoat theory. The resulting models explain a large fraction of the variation and directional changes in exchange rates in sample, although their out-of-sample forecasting performance is mixed.

Suggested Citation

  • Fratzscher, Marcel & Rime, Dagfinn & Sarno, Lucio & Zinna, Gabriele, 2015. "The scapegoat theory of exchange rates: the first tests," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 1-21.
    • Handle: RePEc:eee:moneco:v:70:y:2015:i:c:p:1-21
    DOI: 10.1016/j.jmoneco.2014.09.001
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    More about this item

    Keywords

    Scapegoat; Exchange rates; Economic fundamentals; Survey data;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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