English, Article, Journal or magazine article edition: Long Swings in the Exchange Rate: Are they in the Data and Do Markets Know It? Charles Engel; James D. Hamilton

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Bookmark: http://trove.nla.gov.au/version/140472
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Long Swings in the Exchange Rate: Are they in the Data and Do Markets Know It?
Author
  • Charles Engel
  • James D. Hamilton
Physical Description
  • preprint
Notes
  • The value of the dollar appears to move in one direction for long periods of time. We develop a new statistical model of exchange rate dynamics as a sequence of stochastic, segmented time trends. The paper implements new techniques for parameter estimation and hypothesis testing for this framework. We reject the null hypothesis that exchange rates follow a random walk in favor of our model of long swings. Our model also generates better forecasts than a random walk. We conclude that persistent movement in the value of the dollar is a fact that calls for greater attention in the theory of exchange rate behavior. The model is a natural framework for assessing the importance of the "peso problem" for the dollar. It allows for the expectation of future exchange rates to be influenced by the probability of a change in regime. We nonetheless reject uncovered interest parity. The forward premium appears frequently to put too high a probability on a change in regime.
  • RePEc:nbr:nberwo:3165
Language
  • English
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