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Exchange-rate Discounting

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  • Gregor W. Smith

Abstract

Economists often describe nominal exchange rates as forward-looking, so that they reflect discounted, expected, future fundamentals. This study applies a method for identifying the discount rate involved, without knowing or measuring fundamentals. Identificationarises from assumptions on the stochastic process followed by fundamentals, combined with nonlinearity arising from expected future regime changes. Two applications yield evidence against the present-value model in the form of discount rates which are negativeand statistically significant.

Suggested Citation

  • Gregor W. Smith, 1995. "Exchange-rate Discounting," Working Paper 1248, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1248
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    References listed on IDEAS

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    6. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977, Elsevier.
    7. Michael D. Bordo & Finn E. Kydland, 1990. "The Gold Standard as a Rule," NBER Working Papers 3367, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Gregory Gagnon, 2019. "Vanishing central bank intervention in stochastic impulse control," Annals of Finance, Springer, vol. 15(1), pages 125-153, March.

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    More about this item

    Keywords

    floating exchange rates; regime switching;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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