Recent research demonstrates that the well-documented feeble link between exchange rates and economic fundamentals can be reconciled with conventional exchange rate theories under the assumption that the discount factor is near unity (Engel and West 2005). We provide empirical evidence that this assumption is valid, lending further support to the above explanation of the empirical disconnect between nominal exchange rates and fundamentals.

Discount factor, Exchange rate expectations, Exchange rates, Fundamentals
dx.doi.org/10.1111/j.1538-4616.2009.00212.x, hdl.handle.net/1765/16251
ERIM Article Series (EAS)
Journal of Money, Credit & Banking
Erasmus Research Institute of Management

Sarno, L, & Sojli, E. (2009). The feeble link between exchange rates and fundamentals: Can we blame the discount factor?. Journal of Money, Credit & Banking, 41(2-3), 437–442. doi:10.1111/j.1538-4616.2009.00212.x