The Scapegoat Theory of Exchange Rates: The First Tests

68 Pages Posted: 28 Feb 2015

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Dagfinn Rime

BI Norwegian Business School

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: October 23, 2014

Abstract

The scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2013) suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as scapegoats to rationalize observed currency fluctuations at times when exchange rates are driven by unobservable shocks. Using novel survey data that directly measure foreign exchange scapegoats for 12 exchange rates, we find empirical evidence that supports the scapegoat theory. The resulting models explain a large fraction of the variation and directional changes in exchange rates in sample, although their out-of-sample forecasting performance is mixed.

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

JEL Classification: F31, G10

Suggested Citation

Fratzscher, Marcel and Rime, Dagfinn and Sarno, Lucio and Zinna, Gabriele, The Scapegoat Theory of Exchange Rates: The First Tests (October 23, 2014). Bank of Italy Temi di Discussione (Working Paper) No. 991. Available at SSRN: https://ssrn.com/abstract=2571294 or http://dx.doi.org/10.2139/ssrn.2571294

Marcel Fratzscher

DIW Berlin ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Dagfinn Rime

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
+47-46410507 (Phone)

HOME PAGE: http://home.bi.no/dagfinn.rime/

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 (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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