Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations.

Survey data provide a new measure of exchange-rate expectations superior to the forward rate in that no risk premium interferes. The authors test standard propositions using three sources of survey data. The authors estimate extrapolative, adaptive, and regressive models of expectations. Static or "random walk" expectations and bandwagon expectations are rejected: variables other than the contemporaneous spot rate receive positive weight. A 10 percent appreciation of the dollar generates an expectation of future depreciation over the coming year estimated at 2 percent. In comparing expectations to the true process governing the spot rate, the authors find statistically significant bias. Copyright 1987 by American Economic Association.