Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197947 
Year of Publication: 
2017
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2017-22
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper presents a new testing method for the scapegoat model of exchange rates that aims to tighten the link between the theory on scapegoats and its empirical implementation. This new testing method consists of a number of steps. First, the exchange rate risk premium, the unobserved time-varying structural impact of the macro fundamentals on the exchange rate and the unobserved fundamental of the model are estimated. Next, the scapegoat terms in the model's exchange rate equation are estimated under the restrictions implied by these first-step estimates. The scapegoat terms consist of macro fundamentals, i.e., potential scapegoats, interacted with parameter expectations, where the latter are proxied using survey data. We use a Bayesian Gibbs sampling approach to estimate the different steps of the methodology for eight countries (five developed, three emerging) versus the US over the period 2002Q1-2014Q4. The macro fundamentals 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 0.5 in five out of eight countries (including the Anglo-Saxon economies). We find little evidence to suggest that the other macro fundamentals we consider are scapegoats.
Subjects: 
Exchange rates
Econometric and statistical methods
International financial markets
JEL: 
G15
C32
F31
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
975.39 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.