Are outcomes driving expectations or the other way around?: An I(2) CVAR analysis of interest rate expectations in the dollar/pound market

Katarina Juselius; Josh R. Stillwagon

doi:10.1016/j.jimonfin.2018.02.003

Are outcomes driving expectations or the other way around? An I(2) CVAR analysis of interest rate expectations in the dollar/pound market

9 Citations (Scopus)

Abstract

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.

Original language	English
Journal	Journal of International Money and Finance
Volume	83
Pages (from-to)	93-105
ISSN	0261-5606
DOIs	https://doi.org/10.1016/j.jimonfin.2018.02.003
Publication status	Published - 1 May 2018

Keywords

Faculty of Social Sciences
Exchange rates
Survey forecasts
Speculative bubbles
Expectations
Imperfect knowledge
I(2) CVAR

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10.1016/j.jimonfin.2018.02.003

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title = "Are outcomes driving expectations or the other way around?: An I(2) CVAR analysis of interest rate expectations in the dollar/pound market",

abstract = "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.",

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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

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DO - 10.1016/j.jimonfin.2018.02.003

M3 - Journal article

SN - 0261-5606

VL - 83

SP - 93

EP - 105

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

ER -

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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Keywords

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