Exchange Rates and Fundamentals: A Generalization (joint with John H.Rogers)

東京大学経済学研究科棟 3階 第3教室

James M. Nason 氏
Federal Reserve Bank of Atlanta

Exchange rates have raised the ire of economists for more than 20 years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out of sample forecasts. Engel and West (2005) show that these failures can be explained by the present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper broadens and generalizes the Engel and West (EW) hypothesis. We use standard time series tools to broaden analysis of the PVM. For example, our analysis exploits a common feature implication of the PVM and a discount near unity to show that the exchange rate follows a random walk. A PVM of the exchange rate is also constructed from an open economy dynamic stochastic general equilibrium (DSGE) model. The DSGE-PVM predicts that the exchange rate exhibits random walk behavior. Bayesian estimates reveal that the Canadian dollar-U.S. dollar exchange rate is dominated by permanent monetary and productivity shocks as the discount factor becomes close to one. Thus, our results generalize the EW hypothesis to the larger class of open economy DSGE models, while presenting new challenges for future research.

備考: Macroworkshop と共催

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