Great expectations? evidence from Colombia’s exchange rate survey

Juan Jose Echavarria, Mauricio Villamizar-Villegas

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

© 2016, The Author(s).In this paper, we use the largest exchange rate survey in Colombia to test for the rational expectations hypothesis, the presence of a time-varying risk premium and the accuracy of exchange rate forecasts. Our findings indicate that episodes of exchange rate appreciation preceded expectations of further appreciation in the short run, but were marked by depreciations in the long run. This reversal largely explains the stabilizing pattern of expectations. Additionally, we find that the forward discount differed from future exchange rate changes due to the rejection of the unbiasedness condition and to the presence of a time-varying risk premium. Finally, we find that only short run expectations were able to outperform a random walk process as well as models of extrapolative, adaptive, and regressive expectations. Long-run expectations, on the other hand, behaved poorly in terms of forecasting accuracy.
Translated title of the contributionGrandes expectativas? evidencia de la encuesta sobre el tipo de cambio en Colombia
Original languageEnglish (US)
Pages (from-to)1-27
Number of pages27
JournalLatin American Economic Review
Volume25
Issue number1
DOIs
StatePublished - Jul 1 2016

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