The Scapegoat Theory of Exchange Rates: The First Tests

58 Pages Posted: 14 May 2013

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Gabriele Zinna

Bank of Italy

Multiple version iconThere are 5 versions of this paper

Date Written: May 1, 2013

Abstract

This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2011). This theory suggests that market participants may at times attach significantly more weight to individual economic fundamentals to rationalize the pricing of currencies, which are partly driven by unobservable shocks. Using novel survey data which directly measure foreign exchange scapegoats for 12 currencies and proprietary data on order flow, we find empirical evidence that strongly supports the scapegoat theory of exchange rates, with the resulting models explaining a large fraction of the variation and directional changes in exchange rates.

Keywords: scapegoat, exchange rates, economic fundamentals, survey data

JEL Classification: F31, G10

Suggested Citation

Fratzscher, Marcel and Sarno, Lucio and Zinna, Gabriele, The Scapegoat Theory of Exchange Rates: The First Tests (May 1, 2013). DIW Berlin Discussion Paper No. 1290. Available at SSRN: https://ssrn.com/abstract=2264211 or http://dx.doi.org/10.2139/ssrn.2264211

Marcel Fratzscher (Contact Author)

DIW Berlin ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Lucio Sarno

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gabriele Zinna

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

HOME PAGE: http://gabrielezinna.github.io/

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