Higher order beliefs and the dynamics of exchange rates

Pancotto, Francesca ; Pignataro, Giuseppe ; Raggi, Davide (2014) Higher order beliefs and the dynamics of exchange rates. Bologna: Dipartimento di Scienze economiche DSE, p. 38. DOI 10.6092/unibo/amsacta/4059. In: Quaderni - Working Paper DSE (957). ISSN 2282-6483.
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Abstract

This paper investigates the role of higher order beliefs in the formation of exchange rates. Our model combines a standard macroeconomic dynamics for the exchange rates with a microeconomic specification of agents' heterogeneity and their interactions. The empirical analysis relies on a state space model estimated through Bayesian methods. We exploit data on macroeconomic fundamentals in a panel of subjective forecasts on the euro/dollar exchange rate. The equilibrium strategy on the optimization process of the predictors shows that higher order beliefs is the relevant factor in performing individual forecasting. Moreover public information, namely past exchange rates and fundamentals, plays a crucial role as a coordination device to generate expectations among agents on the basis of their forecasting abilities.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Pancotto, Francesca
Pignataro, Giuseppe
Raggi, Davide
Keywords
beauty contest, higher order beliefs, exchange rates, economic fundamentals, survey data
Subjects
ISSN
2282-6483
DOI
Deposit date
01 Aug 2014 08:17
Last modified
16 Mar 2015 14:51
URI

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