Individual Beliefs, Demand for Currency, and Exchange Rate Dynamics

Vania Stavrakeva and Jenny Tang

No 20321, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this paper, we build a general equilibrium model that takes the institutional details of the foreign exchange market into account and allows for deviations from full information rational expectations (FIRE) in a way consistent with forecast survey data and traders’ asset positions. We show that the testable implications of this model — related to foreign exchange derivatives positions, and both realized and expected exchange rates — are strongly supported in the data. Moreover, we argue that the particular form of deviation from FIRE implied by the data can help resolve important exchange rate puzzles, such as the Fama puzzle and the delayed overshooting puzzle, and can generate hump-shaped dynamics of exchange rates.

Keywords: Survey forecasts; Exchange rate dynamics; Belief formation (search for similar items in EconPapers)
JEL-codes: E52 F31 G01 (search for similar items in EconPapers)
Date: 2025-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP20321 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:20321

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP20321

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().