A Scapegoat Model of Exchange Rate Fluctuations

Details

Serval ID
serval:BIB_626F68393A60
Type
Article: article from journal or magazin.
Collection
Publications
Institution
Title
A Scapegoat Model of Exchange Rate Fluctuations
Journal
American Economic Review, Papers and Proceedings
Author(s)
Bacchetta P., van Wincoop E.
ISSN
0002-8282
Publication state
Published
Issued date
05/2004
Peer-reviewed
Oui
Volume
94
Number
2
Pages
114-118
Language
english
Abstract
While empirical evidence finds only a weak relationship between nominal exchange rates and macroeconomic fundamentals, forex markets participants often attribute exchange rate movements to a macroeconomic variable. The variables that matter, however, appear to change over time and some variable is typically taken as a scapegoat. For example, the current dollar weakness appears to be caused almost exclusively by the large current account deficit, while its previous strength was explained mainly by growth differentials. In this paper, we propose an explanation of this phenomenon in a simple monetary model of the exchange rate with noisy rational expectations, where investors have heterogeneous information on some structural parameter of the economy. In this context, there may be rational confusion about the true source of exchange rate fluctuations, so that if an unobservable variable affects the exchange rate, investors may attribute this movement to some current macroeconomic fundamental. We show that this effect applies only to variables with large imbalances. The model thus implies that the impact of macroeconomic variables on the exchange rate changes over time.
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Create date
19/11/2007 11:29
Last modification date
20/08/2019 15:19
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