Long Swings in the Dollar: Are They in the Data and Do Markets Know It?

Charles Engel and James Hamilton

American Economic Review, 1990, vol. 80, issue 4, 689-713

Abstract: The value of the dollar appears to move in one direction for long periods of time. The authors develop a new statistical model of exchange rate dynamics as a sequence of stochastic, segmented time trends. They reject the null hypothesis that exchange rates follow a random walk in favor of their model of long swings. The authors' model also generates better forecasts than a random walk. The specification is a natural framework for assessing the importance of the "peso problem" for the dollar. The authors nonetheless reject uncovered interest parity. Copyright 1990 by American Economic Association.

Date: 1990
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