We are grateful for constructive comments from Ken West (editor) and an anonymous referee. The authors alone are responsible for the views expressed and for any errors that may remain.
The Feeble Link between Exchange Rates and Fundamentals: Can We Blame the Discount Factor?
Article first published online: 25 MAR 2009
© 2009 The Ohio State University
Journal of Money, Credit and Banking
Volume 41, Issue 2-3, pages 437–442, March-April 2009
How to Cite
SARNO, L. and SOJLI, E. (2009), The Feeble Link between Exchange Rates and Fundamentals: Can We Blame the Discount Factor?. Journal of Money, Credit and Banking, 41: 437–442. doi: 10.1111/j.1538-4616.2009.00212.x
- Issue published online: 25 MAR 2009
- Article first published online: 25 MAR 2009
- Received November 26, 2007; and accepted in revised form April 25, 2008.
- exchange rates;
- exchange rate expectations;
- discount factor
Recent research demonstrates that the well-documented feeble link between exchange rates and economic fundamentals can be reconciled with conventional exchange rate theories under the assumption that the discount factor is near unity (Engel and West 2005). We provide empirical evidence that this assumption is valid, lending further support to the above explanation of the empirical disconnect between nominal exchange rates and fundamentals.