Individual exchange rate forecasts and expected fundamentals

Christian Dick, Ronald MacDonald and Lukas Menkhoff

No 11-062, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: This paper suggests that exchange rates are related to economic fundamentals over medium-term horizons, such as a month or longer. We find from a large panel of individual professionals' forecasts that good exchange rate forecasts benefit from the proper understanding of fundamentals, specifically good interest rate forecasts. This relation is robust to individual fixed effects and further controls. Reassuringly, this relation is stronger during obvious fundamental misalignment. This occurs when exchange rates substantially deviate from their PPP values, when interest rate differentials are high and when exchange rates are less influenced by strong momentum.

Keywords: Exchange Rate Determination; Individual Expectations; Macroeconomic Fundamentals (search for similar items in EconPapers)
JEL-codes: E44 F31 F37 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-for and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:11062

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