Model misspecification, learning and the exchange rate disconnect puzzle
(2009) B E JOURNAL OF MACROECONOMICS. 9(1). p.13-24- abstract
- Rational expectations models fail to explain the disconnect between the exchange rate and macroeconomic fundamentals. In line with survey evidence on the behaviour of foreign exchange traders, we introduce model misspecification and learning into a standard monetary model. Agents use simple forecasting rules based on a restricted information set. They learn about the parameters and performance of different models and can switch between forecasting rules. We compute the implied US-UK post-Bretton Woods exchange rate and show that the excess volatility of the exchange rate return can be reproduced with low values of the learning gain. Both assumptions, misspecification and learning, are necessary to generate this result. However, the implied correlations with the fundamentals are higher than in the data. Including more lags in the model tilts the balance of our findings slightly towards rational expectations and away from the learning hypothesis.
Please use this url to cite or link to this publication:
http://hdl.handle.net/1854/LU-954521
- author
- Vivien Lewis UGent and Agniezska Markiewicz
- organization
- year
- 2009
- type
- journalArticle (original)
- publication status
- published
- subject
- keyword
- EMPIRICAL-EVIDENCE, INFLATION-EXPECTATIONS, MONETARY APPROACH, MARKET, FUNDAMENTALS, UNCERTAINTY, VOLATILITY, FIT, exchange rate, disconnect, misspecification, learning
- journal title
- B E JOURNAL OF MACROECONOMICS
- B E J. Macroecon.
- volume
- 9
- issue
- 1
- article_number
- 13
- pages
- 13 - 24
- Web of Science type
- article
- Web of Science id
- 000265689000002
- JCR category
- ECONOMICS
- JCR impact factor
- 0.343 (2009)
- JCR rank
- 198/243 (2009)
- JCR quartile
- 4 (2009)
- ISSN
- 1935-1690
- language
- English
- UGent publication?
- yes
- classification
- A1
- additional info
- article number : 13 (11 p. )
- id
- 954521
- handle
- http://hdl.handle.net/1854/LU-954521
- date created
- 2010-05-27 09:36:07
- date last changed
- 2011-12-06 13:26:18
@article{954521,
abstract = {Rational expectations models fail to explain the disconnect between the exchange rate and macroeconomic fundamentals. In line with survey evidence on the behaviour of foreign exchange traders, we introduce model misspecification and learning into a standard monetary model. Agents use simple forecasting rules based on a restricted information set. They learn about the parameters and performance of different models and can switch between forecasting rules. We compute the implied US-UK post-Bretton Woods exchange rate and show that the excess volatility of the exchange rate return can be reproduced with low values of the learning gain. Both assumptions, misspecification and learning, are necessary to generate this result. However, the implied correlations with the fundamentals are higher than in the data. Including more lags in the model tilts the balance of our findings slightly towards rational expectations and away from the learning hypothesis.},
articleno = {13},
author = {Lewis, Vivien and Markiewicz, Agniezska},
issn = {1935-1690},
journal = {B E JOURNAL OF MACROECONOMICS},
keyword = {EMPIRICAL-EVIDENCE,INFLATION-EXPECTATIONS,MONETARY APPROACH,MARKET,FUNDAMENTALS,UNCERTAINTY,VOLATILITY,FIT,exchange rate,disconnect,misspecification,learning},
language = {eng},
number = {1},
pages = {13:13--13:24},
title = {Model misspecification, learning and the exchange rate disconnect puzzle},
volume = {9},
year = {2009},
}
- Chicago
- Lewis, Vivien, and Agniezska Markiewicz. 2009. “Model Misspecification, Learning and the Exchange Rate Disconnect Puzzle.” B E Journal of Macroeconomics 9 (1): 13–24.
- APA
- Lewis, V., & Markiewicz, A. (2009). Model misspecification, learning and the exchange rate disconnect puzzle. B E JOURNAL OF MACROECONOMICS, 9(1), 13–24.
- Vancouver
- 1.Lewis V, Markiewicz A. Model misspecification, learning and the exchange rate disconnect puzzle. B E JOURNAL OF MACROECONOMICS. 2009;9(1):13–24.
- MLA
- Lewis, Vivien, and Agniezska Markiewicz. “Model Misspecification, Learning and the Exchange Rate Disconnect Puzzle.” B E JOURNAL OF MACROECONOMICS 9.1 (2009): 13–24. Print.