The discount factor for expected fundamentals: Evidence from a panel of 25 exchange rates

Phornchanok Cumperayot*, Roy Kouwenberg

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

1 Citation (Scopus)
3 Downloads (Pure)

Abstract

In asset pricing models the exchange rate is the discounted present value of expected economic fundamentals. Engel and West (2005) demonstrate that the well-known weak link between exchange rates and fundamentals, such as money supply, output, inflation and interest rates, is an implication of the model if the discount factor is close to one. Empirical evidence so far is limited. In this paper we estimate the discount factor in the money income model and the Taylor rule model for a large cross-section of 25 currencies, in the period 2001–2018. The results confirm that, on average, the discount factor is indeed close to one, while the estimate is lower for currencies of developing economies and at longer forecast horizons.

Original languageEnglish
Pages (from-to)167-176
Number of pages10
JournalInternational Economics
Volume166
DOIs
Publication statusPublished - Aug 2021

Bibliographical note

Funding Information:
This work was supported by the Faculty of Economics, Chulalongkorn University.

Funding Information:
This work was supported by the Faculty of Economics, Chulalongkorn University .

JEL codes: F31, E44, F49

Publisher Copyright:
© 2020 CEPII (Centre d'Etudes Prospectives et d'Informations Internationales), a center for research and expertise on the world economy

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