The scapegoat theory of exchange rates: the first tests

Marcel Fratzscher, Dagfinn Rime, Lucio Sarno and Gabriele Zinna

No 991, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2013) suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as scapegoats to rationalize observed currency fluctuations at times when exchange rates are driven by unobservable shocks. Using novel survey data that directly measure foreign exchange scapegoats for 12 exchange rates, we find empirical evidence that supports the scapegoat theory. The resulting models explain a large fraction of the variation and directional changes in exchange rates in sample, although their out-of-sample forecasting performance is mixed.

Keywords: scapegoat; exchange rates; economic fundamentals; survey data. (search for similar items in EconPapers)
JEL-codes: F31 G10 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-mon and nep-opm
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The scapegoat theory of exchange rates: the first tests (2015)
Working Paper: The Scapegoat Theory of Exchange Rates: The First Tests (2013)
Working Paper: The Scapegoat Theory of Exchange Rates: The First Tests (2012)
Working Paper: The scapegoat theory of exchange rates: the first tests (2012)
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