Estimating Exchange Rate Equations Using Estimated Expectations

Ray Fair ()

Working Papers from Yale University, Department of Economics

Abstract: This paper takes a somewhat different approach from the recent literature in estimating exchange rate equations. It assumes uncovered interest rate parity and models how expectations are formed. Agents are assumed to base their expectations of future interest rates and prices, which are needed in the determination of the exchange rate, on predictions from a ten equation VAR model. The overall model is estimated by FIML under model consistent expectations. The model generally does better than the random walk model, and its properties are consistent with observed effects on exchange rates from surprise interest rate and price announcements. Also, the focus on expectations is consistent with the large observed short run variability of exchange rates.

JEL-codes: F31 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-cba and nep-ifn
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Citations: View citations in EconPapers (1)

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Working Paper: Estimating Exchange Rate Equations Using Estimated Expectations (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:yaleco:33

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