Abstract

This paper uses new survey data on foreign exchange expectations for Argentina, Brazil and Uruguay to test the hypothesis of unbiasedness. The pattern emerging is revealing: only Argentinean forecasts are unbiased predictors of exchange rate movements, while agents err systematically for Brazil and Uruguay. We argue that the systematic intervention of the Argentinean Central Bank in the foreign exchange market is likely to explain this result, as it simplifies the forecast exercise in that market. As long as the requirements to predict well are simple, agents perform well. If instead the exchange rate determination model is intricate, expectation failures arise.

Highlights

  • In a recent contribution, Frankel and Poonawala [1] show that forward markets in emerging currencies are less biased than in major ones

  • Given that the Uruguayan and Argentinean Peso, and the Brazilian Real were floated to different extents, around the beginning of the 2000s, and that the three countries have exhibited relatively low levels of inflation since it is interesting to test for expectation failures in the three markets and investigate whether some pattern can be extracted

  • For the Argentinean Peso/Dollar market, where the Argentinean Central Bank intervention is substantial and rather systematic, we found that unbiasedness of expectations cannot be rejected

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Summary

Introduction

Frankel and Poonawala [1] show that forward markets in emerging currencies are less biased than in major ones. We exploit available survey data on exchange rate expectations for Argentina, Brazil and Uruguay and test the unbiasedness hypothesis for the currencies of these Southern Cone countries.

Results
Conclusion
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