Ghent University Academic Bibliography

Advanced

Model misspecification, learning and the exchange rate disconnect puzzle

Vivien Lewis UGent and Agniezska Markiewicz (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:
author
organization
year
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.