Exchange Rate Dynamics, Learning and Misperception

Pierre-Olivier Gourinchas () and Aaron Tornell

No 9391, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a new explanation for the forward-premium and the delayed-overshooting puzzles. Both puzzles arise from a systematic under-reaction of short-term interest rate forecasts to current innovations. Accordingly, the forward premium is always a biased predictor of future depreciation; the bias can be so severe as to lead to negative coeffcients in the 'Fama' regression; delayed overshooting may or may not occur depending upon the persistence of interest rate innovations and the degree of under-reaction; lastly, for G-7 countries against the U.S., these puzzles can be rationalized for values of the model's parameters that match empirical estimates

JEL-codes: E4 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-rmg
Date: Written
Note: EFG IFM
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Related works:
Working Paper: Exchange Rate Dynamics, Learning and Misperception (2003)
Working Paper: Exchange Rate Dynamics, Learning and Misperception (2000)
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