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- Title
DETECTING SCAPEGOAT EFFECTS IN THE RELATIONSHIP BETWEEN EXCHANGE RATES AND MACROECONOMIC FUNDAMENTALS: A NEW APPROACH.
- Authors
Pozzi, Lorenzo; Sadaba, Barbara
- Abstract
This paper presents a new testing method for the scapegoat model of exchange rates. A number of steps are implemented to determine whether macro-fundamentals are scapegoats for the evolution of exchange rates. Estimation is conducted using a Bayesian Gibbs sampling approach applied to eight countries (five developed and three emerging) versus the USA over the period 2002Q1–2014Q4. The macro-fundamentals that we consider are real GDP growth, the inflation rate, the long-run nominal interest rate, and the current account to GDP ratio. We calculate the posterior probabilities that these macro-fundamentals are scapegoats. For the inflation rate, these probabilities are considerably higher than the imposed prior probabilities of ½ in five out of eight countries (in particular, the Anglo-Saxon economies).
- Subjects
FOREIGN exchange rates; SCAPEGOAT; GIBBS sampling; BALANCE of payments; PRICE inflation
- Publication
Macroeconomic Dynamics, 2020, Vol 24, Issue 4, p951
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100518000585