FURTHER EVIDENCE ON EXCHANGE-RATE EXPECTATIONS

This paper considers a previously unexploited survey data set of exchange rate expectations, which allows us to focus on differences between EMS and dollar exchange rates. We corroborate the earlier finding in the literature that exchange rate forecasts are not rational and that agents do not use all available information efficiently. Although extrapolative and adaptive expectations formation mechanisms describe non-EMS exchange rate expectations to a certain extent, EMS exchange rates forecasts seem to follow long-run fundamentals more closely and would suggest that agents believe that EMS exchange rate expectations ''undershoot' their long-run equilibrium values.