A scapegoat model of exchange rate fluctuations
By: Philippe Bacchetta, Eric van Wincoop.
Contributors: Van Wincoop, Eric.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10245; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10245.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Foreign exchange rates -- Econometric models.
Description: "While empirical evidence finds only a weak relationship between nominal exchange rates and macroeconomic fundamentals, forex markets participants often attribute exchange rate movements to a macroeconomic variable.  The variables that matter, however, appear to change over time and some variable is typically taken as a scapegoat.  For example, the current dollar weakness appears to be caused almost exclusively by the large current account deficit, while its previous strength was explained mainly by growth differentials.  In this paper, we propose an explanation of this phenomenon in a simple monetary model of the exchange rate with noisy rational expectations, where investors have heterogeneous information on some structural parameter of the economy.  In this context, there may be rational confusion about the true source of exchange rate fluctuations, so that if an unobservable variable affects the exchange rate, investors may attribute this movement to some current macroeconomic fundamental.  We show that this effect applies only to variables with large imbalances.  The model thus implies that the impact of macroeconomic variables on the exchange rate changes over time"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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