| Journal of International Money and Finance
On the Consistency of Short-Run and Long-Run Exchange Rate Expectations
This paper examines whether short-term exchange rate expectations 'overreact' by comparing them with long-term expectations. We develop a set of nonlinear restrictions linking expectations at different forecast horizons. The restrictions impose consistency, a property weaker than rationality. We use exchange rate survey data to measure expectations and then test whether consistency holds. The data show that a current, positive exchange rate shock leads investors to expect a higher long-run future spot rate when iterating forward their short-term expectations than when thinking directly about the long run. In this sense short-horizon expectations may overreact to current exchange rate changes.
Fixed exchange rates;
Floating exchange rates;