IDEAS home Printed from https://ideas.repec.org/p/zbw/zewdip/5222.html
   My bibliography  Save this paper

What's on their mind: do exchange rate forecasters stick to theoretical models?

Author

Listed:
  • Schröder, Michael
  • Dornau, Robert

Abstract

Do financial market analysts use structural economic models when forecasting exchange rates? This is the leading question analysed in this paper. In contrast to other studies we use expectations data instead of observable variables. Therefore we analyse the implicit structural models forecasters have in mind when forming their exchange rate expectations. The economic exchange rate models included in our study are purchasing power parity, the flexible-price monetary model, the sticky-price monetary model and the Mundell-Fleming model. These models are the theoretical basis for the estimation of latent structural models using the categorical expectations data of the ZEW financial market survey. The expectation variables used to explain expected exchange rates are short term interest rates, long term interest rates and business expectations. Our results show that the flexible-price monetary model is clearly rejected, but the sticky-price monetary model (in case of DM/Pound Sterling and DM/Yen) and the Mundell-Fleming model (in case of DM/US-Dollar) are both compatible with the estimated parameters.

Suggested Citation

  • Schröder, Michael & Dornau, Robert, 1999. "What's on their mind: do exchange rate forecasters stick to theoretical models?," ZEW Discussion Papers 99-08, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:5222
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/24294/1/dp0899.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004, September.
    2. Wai-Yin Poon & Sik-Yum Lee, 1987. "Maximum likelihood estimation of multivariate polyserial and polychoric correlation coefficients," Psychometrika, Springer;The Psychometric Society, vol. 52(3), pages 409-430, September.
    3. Sarno,Lucio & Taylor,Mark P., 2003. "The Economics of Exchange Rates," Cambridge Books, Cambridge University Press, number 9780521485845.
    4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    5. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    6. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290, World Scientific Publishing Co. Pte. Ltd..
    2. Sergio Da Silva, 2004. "International Finance, Levy Distributions, and the Econophysics of Exchange Rates," International Finance 0405018, University Library of Munich, Germany.
    3. Paul De Grauwe & Marianna Grimaldi, 2014. "Exchange Rate Puzzles: A Tale of Switching Attractors," World Scientific Book Chapters, in: Exchange Rates and Global Financial Policies, chapter 3, pages 71-117, World Scientific Publishing Co. Pte. Ltd..
    4. Otavio De Medeiros, 2005. "Order Flow and Exchange Rate Dynamics in Brazil," Finance 0503019, University Library of Munich, Germany.
    5. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    6. Michael Schroder & Robert Dornau, 2002. "Do forecasters use monetary models? an empirical analysis of exchange rate expectations," Applied Financial Economics, Taylor & Francis Journals, vol. 12(8), pages 535-543.
    7. Makin, Anthony J., 2013. "Commodity prices and the macroeconomy: An extended dependent economy approach," Journal of Asian Economics, Elsevier, vol. 24(C), pages 80-88.
    8. Paul De Grauwe & Marianna Grimaldi, 2004. "Bubbles and Crashes in a Behavioural Finance Model," CESifo Working Paper Series 1194, CESifo.
    9. Paul De Grauwe & Marianna Grimaldi, 2003. "Intervention in the Foreign Exchange Market in a Model with Noise Traders," Working Papers 162003, Hong Kong Institute for Monetary Research.
    10. Richard K. Lyons, 2002. "Foreign exchange: macro puzzles, micro tools," Economic Review, Federal Reserve Bank of San Francisco, pages 51-69.
    11. Pippenger, John, 2004. "The Modern Theory of the LOP and PPP: Some Implications," University of California at Santa Barbara, Economics Working Paper Series qt60z886n7, Department of Economics, UC Santa Barbara.
    12. Yinghao LUO, 2016. "Nonlinear Trend and Purchasing Power Parity," Journal of Economics Bibliography, KSP Journals, vol. 3(3), pages 490-497, September.
    13. Samih Antoine Azar, 2008. "The Effect of the Lebanese Peg to the US Dollar on Market Efficiency and Risk," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 7(1), pages 1-15, January.
    14. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    15. Peter Rowland, 2003. "Uncovered Interest Parity and the USD/COP Echange Rate," Borradores de Economia 227, Banco de la Republica de Colombia.
    16. Oscar Bajo Rubio & María Dolores Montávez Garcés, 1998. "Tipo de cambio, expectativas y nueva información: evidencia para el caso de la peseta, 1986-1996," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 9801, Departamento de Economía - Universidad Pública de Navarra.
    17. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
    18. Zhang, Hui Jun & Dufour, Jean-Marie & Galbraith, John W., 2016. "Exchange rates and commodity prices: Measuring causality at multiple horizons," Journal of Empirical Finance, Elsevier, vol. 36(C), pages 100-120.
    19. Clements, Kenneth & Lan, Yihui & Roberts, John, 2008. "Exchange-rate economics for the resources sector," Resources Policy, Elsevier, vol. 33(2), pages 102-117, June.
    20. Hau, Harald, 2002. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 611-630, August.

    More about this item

    Keywords

    Exchange rate modelling; Expectations; Survey data; Categorical Data;
    All these keywords.

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:zewdip:5222. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/zemande.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.