 On the unstable relationship between exchange rates and macroeconomic fundamentalsPhilippe Bacchetta and Eric van Wincoop Journal of International Economics, 2013, vol. 91, issue 1, 18-26 Abstract: Survey evidence shows that the relationship between the exchange rate and macro fundamentals is perceived to be highly unstable. We argue that this unstable relationship naturally develops when structural parameters in the economy are unknown. We show that the reduced form relationship between exchange rates and fundamentals is then driven not by the structural parameters themselves, but rather by expectations of these parameters. These expectations can vary significantly over time as a result of perfectly rational “scapegoat” effects. These effects can be expected to hold more broadly in macro and finance beyond the application to exchange rates in this paper. Keywords: Imperfect information; Time-varying parameters; Parameter uncertainty (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:inecon:v:91:y:2013:i:1:p:18-26 DOI: 10.1016/j.jinteco.2013.06.001 Access Statistics for this article Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, Andrés More articles in Journal of International Economics from Elsevier |
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