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A Survey of Empirical Research on Nominal Exchange Rates
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JEFFREY A. FRANKEL
Harvard University - John F. Kennedy School of Government; National Bureau of Economic Research (NBER)
ANDREW K. ROSE
University of California - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
September 1994
NBER Working Paper No. W4865
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Abstract:
We survey the empirical literature on floating nominal exchange rates over the past decade. Exchange rates are difficult to forecast at short- to medium-term horizons. There is a bit of explanatory power to monetary models such as the Dornbusch 'overshooting' theory, in the form of reaction to 'news' and in forecasts at long-run horizons. Nevertheless, at short horizons, a driftless random walk characterizes exchange rates better than standard models based on observable macroeconomic fundamentals. Unexplained large shocks to floating rates must then, logically, be due either to innovations in unobservable fundamentals, or to non-fundamental factors such as speculative bubbles. The observed difference in exchange rate and macroeconomic volatility under different nominal exchange rate regimes makes us skeptical of the first view. The theory and evidence on speculative bubbles, however, is not conclusive. We conclude with the hope that promising new studies of the microstructure of the foreign exchange market might eventually rise to insights into these phenomena.
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JEL Classifications: F3
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Working Paper Series
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Suggested Citation
Frankel, Jeffrey A. and Rose, Andrew K., "A Survey of Empirical Research on Nominal Exchange Rates"
(September 1994).
NBER Working Paper No. W4865. Available at SSRN: http://ssrn.com/abstract=226526
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Contact Information for
JEFFREY
A.
FRANKEL
(Contact Author)
Email address for JEFFREY
A.
FRANKEL
Harvard University - John F. Kennedy School of Government
79 John F. Kennedy Street
Cambridge
, MA
02138
United States
617-496-3834 (Phone)
617-496-5747 (Fax)
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(No e-mail address available for JEFFREY
A.
FRANKEL
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge
, MA
02138
United States
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Contact Information for
ANDREW K.
ROSE
Email address for ANDREW K.
ROSE
University of California - Haas School of Business
Berkeley
, CA
94720
United States
510-642-6609 (Phone)
510-642-4700 (Fax)
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(No e-mail address available for ANDREW K.
ROSE
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge
, MA
02138
United States
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(No e-mail address available for ANDREW K.
ROSE
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR
United Kingdom
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