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Discussion Paper Details

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Title: Should One Rely on Professional Exchange Rate Forecasts? An Empirical Analysis of Professional Forecasts for the ?/US$ Rate

Author(s): Peter Bofinger and Robert Schmidt

Publication Date: February 2004

Keyword(s): anchoring heuristic, behavioural finance, forecasts, foreign exchange market and rational expectations

Programme Area(s): International Macroeconomics

Abstract: The study analyses the characteristics of professional exchange rate forecasts for the ?/US$ rate. The results indicate that the quality of forecasts produced by professional economists is rather poor and incompatible with the rational expectations hypothesis. This dismal result is according to our analysis attributed to the fact that professional forecasts are to a large extent influenced by actual changes in exchange rates. A reasonable explanation for this behaviour can be derived from the behavioural finance literature. According to the anchoring heuristic, decision processes are often dominated by available pieces of information even if they are obviously of no relevance.

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Bibliographic Reference

Bofinger, P and Schmidt, R. 2004. 'Should One Rely on Professional Exchange Rate Forecasts? An Empirical Analysis of Professional Forecasts for the ?/US$ Rate'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4235