 Fundamental determinants of exchange rate expectationsJoscha Beckmann and Robert L. Czudaj International Journal of Forecasting, 2025, vol. 41, issue 3, 1003-1021 Abstract: This paper provides a new perspective on the expectations-building mechanism in foreign exchange markets. We analyze the role of expectations regarding macroeconomic fundamentals for expected exchange rate changes. Real-time survey data is assessed for 29 economies from 2002 to 2023, and expectations regarding GDP growth, inflation, interest rates, and current accounts are considered. Our empirical findings show that fundamentals expectations are more important over longer than shorter horizons. We find that an expected increase in GDP growth relative to the US leads to an expected appreciation of the domestic currency. In contrast, higher relative inflation expectations lead to an expected depreciation, a finding consistent with purchasing power parity. Our results also indicate that the expectation-building process differs systematically across pessimistic and optimistic forecasts, with the former paying more attention to fundamentals expectations. Finally, we also observe that fundamentals expectations have some explanatory power for forecast errors, especially for longer horizons. Keywords: Exchange rates; Expectations; Forecast errors; Fundamentals; Survey data (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:41:y:2025:i:3:p:1003-1021 DOI: 10.1016/j.ijforecast.2024.09.004 Access Statistics for this article International Journal of Forecasting is currently edited by R. J. Hyndman More articles in International Journal of Forecasting from Elsevier |
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