ECB paper finds evidence in support of exchange rate scapegoat theory


Expectations of structural parameters, and their interaction with unobservable fundamentals, are important to improve short-term forecasts of exchange rate fluctuations, according to a European Central Bank paper published on February 1.

Marcel Fratzscher, Lucio Sarno and Gabriele Zinna, the paper's authors, use novel survey data from 12 currencies to test whether the scapegoat theory of exchange rates explains the poor empirical performance of traditional exchange rate models. While the

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