Consistency under exponential forecasting

We study the consistency property in the exchange rate expectation formation process, which all rational forecasts have, but which itself does not require rationality. An alternative test procedure recommended by Pesaran (1989) is applied. Survey data helps avoid the risk premium issue altogether. The exponential forecasting framework provides evidence of bandwagon effects in the expectation formation process. Consistency is upheld at the shorter forecast horizon, but breaks down conclusively for the longer forecast periods. These results are supported by Froot and Ito (1989).