Essays in Memory of Albert Ando
Edited by Lawrence R. Klein
Chapter 13: Rationality, Behavior and Switching Idiosyncracies in the Euro–Dollar Exchange Rate
Gabriella Cagliesi and Massimo Tivegna 1. INTRODUCTION: THE NEWS APPROACH AND BEHAVIORAL FINANCE The time proﬁle of the euro-dollar (€–$) exchange rate has a U-shaped form (see Figure 13.1). This exchange rate is the youngest among the major pairs and its initial values have been the object of an extensive negotiation among the participating countries1 so it must be assumed it was close to some form of ‘equilibrium’: at 1.17 on 4 January 1999. At its lowest this exchange rate was at 0.82; in the last part of 2004 the rate was above 1.3000. Values so far apart point to a persistence of misalignment vis-à-vis the dollar for long periods. This is not big news in today’s currency market. The theory of exchange rate determination has accordingly been looking, in recent times, for novel explanations of the ﬂuctuations in exchange rates. The dynamics of these variables was traditionally investigated in the 1970s and 1980s in terms of equilibrium relationships between the exchange rate and a group of macroeconomic variables, called ‘fundamentals’ (economic activity variables, inﬂation, interest rates, monetary and ﬁnancial aggregates, etc.). The appearance in the 1980s of the paper by Meese and Rogoﬀ (1983) casting serious doubts on the forecasting performance of this class of models generated a parallel reconsideration of equilibrium schemes in favor – among other schemes – of news models. In this latter approach it is the surprise in the fundamentals (the ‘news’) moving exchange rates. The purpose of this chapter is to investigate the determinants...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.