Are Exchange Rates Excessively Variable?

Jeffrey Frankel and Richard Meese ()

No 2249, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: "Unnecessary variation" is defined as variation not attributable to variation in fundamentals. In the absence of a good model of macroeconomic fundamentals, the question "are exchange rates excessively variable?" cannot be answered by comparing the variance of the actual exchange rate to the variance of a set of fundamentals. This paper notes the failure of regression equations to explain exchange rate movements even using contemporaneous macroeconomic variables. It notes as well the statistical rejections of the unbiasedness of the forward exchange rate as a predictor of the spot rate. It then argues that, given these results, there is not much to be learned from the variance-bounds tests and bubbles tests. The paper also discusses recent results on variation in the exchange risk premiums arising from variation in conditional variances, both as a source of the bias in the forward rate tests and as a source of variation in the spot rate. It finishes with a discussion of whether speculators' expectations are stabilizing or destabilizing, as measured by survey data. The paper concludes that it is possible that exchange rates have been excessively variable -- as, for example, when there are speculative bubbles -- but that if policy-makers try systematically to exploit their credibility in order to stabilize exchange rates, they may see their current credibility vanish.

Date: 1987-05
Note: LS
References: Add references at CitEc
Citations: View citations in EconPapers (62)

Published as Fischer, Stanley (ed.) NBER Macroeconomics Annual 1987, Vol. 2. The MIT Press, 1987
Published as Are Exchange Rates Excessively Variable? , Jeffrey A. Frankel, Richard Meese. in NBER Macroeconomics Annual 1987, Volume 2 , Fischer. 1987

Downloads: (external link)
http://www.nber.org/papers/w2249.pdf (application/pdf)

Related works:
Chapter: Are Exchange Rates Excessively Variable? (1987)
Working Paper: Are Exchange Rates Excessively Variable? (1987)
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:nbr:nberwo:2249

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w2249

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().