Long Swings in the Dollar: Are They in the Data and Do Markets Know It?

Deskripsi

The value of the dollar appears to move in one direction for long periods of time. We develop a new statistical model of exchange rate dynamics as a sequence of stochastic, segmented time trends. We reject the null hypothesis that exchange rates follow a random walk in favor of our model of long swings. Our model also generates better forecasts than a random walk. The specification is a natural framework for assessing the importance of the "peso problem" for the dollar. We nonetheless reject uncovered interest parity.