This paper presents a new testing method for the scapegoat model of exchange rates. A number of steps are implemented to determine whether macro-fundamentals are scapegoats for the evolution of exchange rates. Estimation is conducted using a Bayesian Gibbs sampling approach applied to eight countries (five developed and three emerging) versus the USA over the period 2002Q1-2014Q4. The macro-fundamentals that we consider are real GDP growth, the inflation rate, the long-run nominal interest rate, and the current account to GDP ratio. We calculate the posterior probabilities that these macro-fundamentals are scapegoats. For the inflation rate, these probabilities are considerably higher than the imposed prior probabilities of 1/2 in five out of eight countries (in particular, the Anglo-Saxon economies).

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Macroeconomic Dynamics
Erasmus University Rotterdam

Pozzi, L., & Sadaba, B. (Barbara). (2018). Detecting scapegoat effects in the relationship between exchange rates and macroeconomic fundamentals: a new approach. Macroeconomic Dynamics. doi:10.1017/S1365100518000585