Forecaster Rationality and Expectation Formation in Foreign Exchange Markets: Do Emerging Countries Differ from Industrialized Economies?

This paper uses the Consensus Economic Forecast poll to investigate how forecasters in the foreign exchange market form expectations and whether the expectation formation process differs between industrialized and emerging countries. In order to explain the expectation formation of forecasters in countries and country groups, we analyze around 50,000 forecasts for 22 OECD member currencies. We find that differences between the way forecasters in industrialized countries and emerging countries form exchange rate expectations. However, we show that one important difference is due to a difference in forecasting behavior of emerging countries. Controlling for this feature lets the forecasting behavior in emerging countries resemble more the ones found for industrialized countries, but not for all forecast horizons. [ABSTRACT FROM AUTHOR]