Are outcomes driving expectations or the other way around? An I(2) CVAR analysis of interest rate expectations in the dollar/pound market
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Are outcomes driving expectations or the other way around? An I(2) CVAR analysis of interest rate expectations in the dollar/pound market. / Juselius, Katarina; Stillwagon, Josh R.
In: Journal of International Money and Finance, Vol. 83, 01.05.2018, p. 93-105.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Are outcomes driving expectations or the other way around?
T2 - An I(2) CVAR analysis of interest rate expectations in the dollar/pound market
AU - Juselius, Katarina
AU - Stillwagon, Josh R.
PY - 2018/5/1
Y1 - 2018/5/1
N2 - This paper uses consensus forecasts to address empirical puzzles in international macro using the Cointegrated VAR model. The data, consisting of three-month Libor rates, their three-month ahead forecasts, prices and exchange rates for the US and UK, were all found to be near I(2) consistent with imperfect knowledge expectations. The I(2) analysis showed that over the medium run the nominal exchange rate has moved away from equilibrium values with interest rates following suit, whereas over the long run the nominal exchange rate was adjusting while the interest rate forecasts pushed the system away from steady state. Evidence of self-reinforcing feedback mechanisms in the system signals the importance of speculative bubbles for the determination of the exchange rate and the interest rates.
AB - This paper uses consensus forecasts to address empirical puzzles in international macro using the Cointegrated VAR model. The data, consisting of three-month Libor rates, their three-month ahead forecasts, prices and exchange rates for the US and UK, were all found to be near I(2) consistent with imperfect knowledge expectations. The I(2) analysis showed that over the medium run the nominal exchange rate has moved away from equilibrium values with interest rates following suit, whereas over the long run the nominal exchange rate was adjusting while the interest rate forecasts pushed the system away from steady state. Evidence of self-reinforcing feedback mechanisms in the system signals the importance of speculative bubbles for the determination of the exchange rate and the interest rates.
KW - Faculty of Social Sciences
KW - Exchange rates
KW - Survey forecasts
KW - Speculative bubbles
KW - Expectations
KW - Imperfect knowledge
KW - I(2) CVAR
U2 - 10.1016/j.jimonfin.2018.02.003
DO - 10.1016/j.jimonfin.2018.02.003
M3 - Journal article
VL - 83
SP - 93
EP - 105
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
SN - 0261-5606
ER -
ID: 199176214