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- Title
Forecasts of Exchange Rates and Interest Rates: Is there Method to the Madness?
- Authors
Benrud, Erik
- Abstract
I use the semi-annual WSJ economic forecasts to analyze the relationships among the forecasts of the Treasury bill rate, the Treasury bond rate, the yen/dollar exchange rate, and the euro/dollar exchange rate. The goal is to learn how experts believe the variables relate to one another. I found that, from period to period, the correlations of a given exchange rate forecast with either one of the interest rate forecasts are not constant. About 60 percent of the correlations are negative and 40 percent are positive. The correlations of forecasts across periods for each expert indicate that most experts associate higher interest rates with lower yen/dollar exchange rates but associate higher interest rates with higher euro/dollar exchange rates. The strongest relationship is between the exchange rate forecasts and the difference of the bond and bill forecasts, i.e., the slope of the yield curve. The results indicate that, across time, forecasters generally associate a steeper yield curve with an increase in both the yen/dollar and euro/dollar exchange rates, i.e., a stronger dollar in both cases.
- Publication
Proceedings of the Northeast Business & Economics Association, 2008, p40
- ISSN
1936-203X
- Publication type
Conference Proceeding