A Fundamental Connection: Exchange Rates and Macroeconomic Expectations
Abstract: This paper presents new stylized facts about exchange rates and their relationship with macroeconomic fundamentals. We show that macroeconomic surprises explain a large majority of the variation in nominal exchange rate changes at a quarterly frequency. Using a novel present value decomposition of exchange rate changes that is disciplined with survey forecast data, we show that macroeconomic surprises are also a very important driver of the currency risk premium component and explain about half of its variation. These surprises have even greater explanatory power during economic downturns and periods of financial uncertainty.
File format is text/html
File format is application/pdf
Description: Full text
Provider: Federal Reserve Bank of Boston
Part of Series: Working Papers
Publication Date: 2020-12-01