Exchange rates and fundamentals
Subtitle: a generalization
By: James M. Nason and John H. Rogers.
Contributors: Rogers, John Harold.
Series: International finance discussion papers -- no. 948; International finance discussion papers (Online) -- no. 948.
Publisher: Federal Reserve Board
Published: 2008
Place of publication: Washington, D.C
Language: eng
Format: Electronic resource
Description: "Exchange rates have raised the ire of economists for more than 20 years.  The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out of sample forecasts.  Engel and West (2005) show that these failures can be explained by the standard-present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root.  This paper generalizes the Engel and West (EW) hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models.  The EW hypothesis is shown to hold for a canonical open economy DSGE model.  We show that all the predictions of the standard-PVM carry over to the DSGE-PVM.  The DSGE-PVM also yields an unobserved components (UC) models that we estimate using Bayesian methods and a quarterly Canadian-U.S.  sample.  Bayesian model evaluation reveals that the data support a UC model that calibrates the discount factor to one implying the Canadian dollar-U.S.  dollar exchange rate is a random walk dominated by permanent cross-country monetary and productivity shocks"--Federal Reserve Board web site.
Notes: Title from PDF file as viewed on 6/18/2009.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.