Chartists, Fundamentalists, and Trading in the Foreign Exchange Market

5 Pages Posted: 7 Jan 2002

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Kenneth Froot

National Bureau of Economic Research (NBER); Harvard Business School

Date Written: May 1990

Abstract

The overshooting theory of exchange rates seems ideally designed to explain some important aspects of the movement of the dollar in recent years. Over the period 1981-84, for example, when real interest rates in the United States rose above those of its trading partners (presumably due to shifts in the monetary/fiscal policy mix), the dollar appreciated strongly. It was the higher rates of return that made U.S. assets more attractive to international investors and caused the dollar to appreciate. The overshooting theory would say that, as of 1984 for example, the value of the dollar was so far above its long-run equilibrium that expectations of future deprecation were sufficient to offset the higher nominal interest rate in the minds of international investors. Figure 1 shows the correlation of the real interest differential with the real value of the dollar, since exchange rates began to float in 1973.

JEL Classification: 43

Suggested Citation

Frankel, Jeffrey A. and Froot, Kenneth, Chartists, Fundamentalists, and Trading in the Foreign Exchange Market (May 1990). NBER Working Paper No. R1512. Available at SSRN: https://ssrn.com/abstract=227452

Jeffrey A. Frankel (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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617-496-3834 (Phone)
617-496-5747 (Fax)

HOME PAGE: http://www.ksg.harvard.edu/fs/jfrankel

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Kenneth Froot

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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