A Test of the Post Keynesian Hypothesis on Expectation Formation in the Foreign Exchange Market

This paper presents structural time series evidence supporting the Post Keynesian hypothesis on the role of expectations in the foreign exchange market. For all of the four exchange rates examined, the hypothesis that exchange rates are driven primarily by expectations is strongly supported. The results, however, do not preclude a role for non-expectational variables. This evidence is taken to be detrimental to the rational expectations hypothesis, which implies that expectations do not affect the objective variable.