Information rigidities and exchange rate expectations

Abstract

Sluggish adjustment of expectations to new information is rational in an environment characterized by information costs and signal-to-noise problems. This paper investigates the role of such information rigidities for exchange rate expectations using data from Consensus Economics for ten emerging and industrial economies from 1999 until 2015. Our results confirm the importance of rigidities and show that the inclusion of forecast updates largely accounts for otherwise detected biases in expectation errors. Moreover, we find little evidence for a systematic effect of fundamentals or uncertainty measures on exchange rate disagreement.