[position in research by date]
[position in research by subject]
"Estimating Exchange Rate Equations Using Estimated
Expectations"
April 2008, submitted.
pdf file (104KB).
Abstract
This paper takes a somewhat different approach from much of the literature
in estimating exchange rate equations.
It assumes uncovered
interest rate parity and models how expectations are formed.
The rational expectations assumption is not imposed.
Agents are assumed to base their expectations of future interest rates and
prices, which are needed in the determination of the exchange rate, on
predictions from a ten equation VAR model. The overall
model is estimated by FIML
under model consistent expectations. The model generally does better than
the random walk model, and its properties are consistent with observed
effects on
exchange rates from surprise interest rate and price announcements.
Also, the focus on expectations is consistent with the large observed
short run variability of exchange rates.
Comments