Individual Exchange Rate Forecasts and Expected Fundamentals

53 Pages Posted: 9 Jan 2012

See all articles by Christian David Dick

Christian David Dick

ZEW – Leibniz Centre for European Economic Research

Ronald MacDonald

University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Date Written: 2011

Abstract

This paper suggests that exchange rates are related to economic fundamentals over medium-term horizons, such as a month or longer. We find from a large panel of individual professionals' forecasts that good exchange rate forecasts benefit from the proper understanding of fundamentals, specifically good interest rate forecasts. This relation is robust to individual fixed effects and further controls. Reassuringly, this relation is stronger during obvious fundamental misalignment. This occurs when exchange rates substantially deviate from their PPP values, when interest rate differentials are high and when exchange rates are less influenced by strong momentum.

Keywords: exchange rate determination, individual expectations, macroeconomic fundamentals

JEL Classification: F31, F37, E44

Suggested Citation

Dick, Christian David and MacDonald, Ronald R. and Menkhoff, Lukas, Individual Exchange Rate Forecasts and Expected Fundamentals (2011). ZEW - Centre for European Economic Research Discussion Paper No. 11-062. Available at SSRN: https://ssrn.com/abstract=1981877 or http://dx.doi.org/10.2139/ssrn.1981877

Christian David Dick (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Ronald R. MacDonald

University of Strathclyde in Glasgow - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom
+44 141 548 3861 (Phone)

Government of New Zealand - Department of Economics

2 The Terrace
P.O. Box 2498
Wellington
New Zealand

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

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