Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange
Year: 1989
Type: article
Abstract: Recent evidence concerning dollar forecasts during the early 1980s have led to assertions that the market was irrational. This paper investigates an alternative interpretation. Following the tightening of the U.S. money market, agents did not immediately believe that the change would persist, but instead learned the shift rationally. Empirical simulations indicate that the model appears consistent with about half of the dollar's underprediction implied by the forward market during the period.
Author: Karen K. Lewis
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1512934396