The New Fama Puzzle Persists

In previous posts [1] [2], I described how in data up to the beginning of 2016, the Fama puzzle was overturned for major currencies. One question was whether the change would persist post-crisis and post-Zero Lower Bound (ZLB) exit. The short answer is, so far, yes.

This is shown using data from a forthcoming paper w/Jeffrey Frankel (earlier version here), where we demonstrate that the reversal of the Fama regression coefficient holds, including when using forward rate data instead of interest rate data.  First, consider the Fama regression:

s+1 – s = α’ + β'(i-i*) + error

ε(s+1) is subjective market expectations of the future spot exchange rate (proxied using Currency Forecasters Digest/FT FX forecasts/FXForecasts survey data).

Fama regression coefficients are the  β’ is the OLS regression coefficient. The estimated β’ for 1986-2008 and 2008M09 -2018M01 are shown in Figures 1 and 2, respectively.

Figure 1: Regression coefficient of 3 month annualized ex post depreciation on interest differential, for AUS, CAN, DNK, JPN, NZL, NOR, SWE, CHE, GBR, EUR, HKG, SGP, ZAF, all pre-crisis.

Figure 2: Regression coefficient of 3 month annualized ex post depreciation on interest differential, for AUS, CAN, DNK, JPN, NZL, NOR, SWE, CHE, GBR, EUR, HKG, SGP, ZAF, all post-crisis.

These results are robust to starting the post-crisis sample in 2010.

The key finding here, as in Bussiere, Chinn, Ferrara and Heipertz (2018), is that before the crisis, the correlation between ex post depreciation and interest differentials for advanced economies is negative. After the crisis, and during the zero lower bound (ZLB) era, it is positive. There are two non-reversal currencies (which were not included in the BCFH paper): Singapore dollar and South African rand. Note that these are emerging market currencies, and we do not expect to see the same factors and behaviors (neither at or near ZLB).

Currently, I’m at the NBER Summer Institute. Two excellent papers presented this morning in the International Finance & Macro meetings link up with these results, directly (Kalemli-Ozcan and Varela) and indirectly (Lilley, Maggiore, Neiman, and Schreger). For the latter, the question asked in the session is whether the results will persist far into the future (when many interest rates are above the ZLB) is also germane to our results.

(Of course, given how things are going, maybe there’ll be a lot of currencies returning to ZLB…)

15 thoughts on “The New Fama Puzzle Persists

  1. Bob Flood

    Is the world becoming a $US currency area? If so what’s it worth? (I was just reading some stuff by Gopinath suggesting it’s so but with no attached value.)

    1. Moses Herzog

      The paper has some value. I would think for traders if no one else, but must be some other ripples in the water there.

  2. Barkley Rosser

    Of course the longstanding problem with having such a dominant world currency is that this increases demand for it leading to an arguable overvaluation of the currency. Indeed, it is not out of the question that this is a major reason why the US has had a chronic trade deficit for over 40 years now, with this expanding recently. So, from some perspectives it may be of negative value, although obviously we can buy foreign goods more cheaply so have more real income.

  3. Moses Herzog

    Fantastic post, terrific easy to read graphs. Also appreciate the links. We can have strong political talk, and highly intellectual technocrat type dialogue on the same blog, It can be done. And Menzie shows it can be done on an in-essense daily basis.

    Having strong political opinions and a high self-governed standard for academic work are not mutually exclusive. Menzie “gets it”. And it enriches our lives (or certainly enriches mine) in the process.

  4. Moses Herzog

    I put this same comment (but slightly abbreviated) in Professor Hamilton’s thread. I assume it either wasn’t seen because Professor Hamilton is exceedingly busy or Prof Hamilton had his own legit reasons for filtering it. I’m posting it again (a third time) to make certain Barkley Rosser sees it. I will hold this offer out for 2 weeks, after which it will be lost in the abyss to wherever “the better angels of our nature” reside. Not that I know where the Hell that is.

    @ Barkley Rosser
    I’ll make you a deal—if you can tell me what Harris’s 1% lead (in the one single poll you are quoting, “Focus on Rural America”) over Biden equates to in people surveyed (without other commenters here posting it before you do) you’ll get your apology—an apology BTW, you don’t deserve based on the number of false statements you have made prior to this time, and never apologized for yourself. But you will get that apology, if you can tell me what that 1% Harris over Biden lead equates to in number of people surveyed.

    I happen to know the answer to that question Barkley— you better type it carefully when you post that number if you want your apology.

    1. Barkley Rosser

      Wow, you really do not get it, do you, “Moses Herzog.” You make a flamingly false accusation accompanied by extreme cursing and invective and all sorts of enlarged and bolded letters. Then when it in fact becomes clear your accusation was false and an apology is demanded, you instead start issuing demands and running across several threads with your ridiculous and completely unacceptable demands, which are accompanied by yet more unacceptable insults.

      Frankly, I am not surprised Jim Hamilton did not let you post this stupid and nauseating garbage on his thread. Menzie should not either. You are completely out of control with your ranting and emotional instability. If you are not already seeing a shrink, you seriously need to start doing so immediately, “Moses Herzog.”

      1. Moses Herzog

        @ Barkley Junior
        You’re obviously not going to make ANY attempt to answer the question—so you have forfeited your apology from me—which you would have gotten–but that is your choice. The answer to the question of what the 1% lead Kamala Harris has over Biden equates to in people surveyed in the “Focus On Rural America” poll??

        Six people [edited MDC]

        1. Barkley Rosser

          Of course not, boy.

          BTW, since you have been claiming that I have made “false statements you have not apologized for” I challenged you to produce any. You have failed to do so, boy. Of course, I forestalled your oldie but goodie about how I know nothing about skewed distributions by reminding you that a genome is not a population. One of my false statements was that I thought I had quoted somebody citing Quora when in fact I had pulled something off Quora when I googled something, although I had never ever gone to Quora itself. When that was pointed out I agreed I had made a mistake (don’t know if I apologized as well). You have made lots of negative remarks about Quora, but today I finally went there specifically for the first time but did not want to waste time signing in. However, I did some checking, and while this question and answer site, now worth about $2 billion, is a mixed bag, it apparently has many professionals participating and generally has a good rep, with many of its answers of high quality, especially those that show up if you googe something, which is what I did. You have been just full of it on your claims about Quora..

          So, boy, you owe me a fresh apology, please. That is for making in your demand above the statement I just quoted, your claim I have made mistakes that I have not apologized for. I have already asked you to provide one. You have not done so, the request still stands. You are in serious danger of falling fully into lie lie land with CoRev, who when confronted could not provide any actual factually incorrect statements about the US space program that I had made, although he kept claiming I had. As it is, he stands accused of making up all the supposed honors he received for his work with it and has not provided a shred of evidence to support his claims.

          Now you have been caught making a flagrantly false statement about me that you refuse to apologize for. You also have failed to provide even one false statement that I have not at least admitted was incorrect when it was pointed out, usually with an apology also attached. The challenge stands: produce one false statement I have made I have not agreed was mistaken when it was pointed out, even one. You need to apologize for making this false claim, as well as your ridiculous one that there was no poll in Iowa showing among Dems Warren at 20%, Harris at 18%, Biden at 17%, and Sanders at 12%, when in fact there was.

          I am tempted to say you have mud on your face, boy, but I am afraid what is on there is a bit stinkier than mud.

    1. Barkley Rosser

      “If Paul Krugman is the emperor of the new economic geography, he is an emperor without clothes.”

      final line of

      Book Review of Paul Krugman’s _Development, Geography, and Economic Theory_
      Journal of Economic Behavior and Organization
      December 1996, vol. 31, pp. 450-454
      J. Barkley Rosser, Jr.

      This flew around the internet when PK got his Nobel. My official position, widely supported, was that he deserved it, but it should have been shared with Avinash Dixit and Masahisa Fujita. When I commented on this several times on one blog, an Anonymous showed up who wrote, “OK, you’ve made your point, now shut up.”

      1. Moses Herzog

        @ Barkley Junior
        I just bet anything you wrote “flew around the internet”. Just like “Princeton”Kopits’ anti-immigrant screed was being memorized by Homeland Security’s Kirstjen Nielson every night before bed.

        1. Barkley Rosser

          Just to double check I googled “Krugman new economic geography emperor without clothes.” A lot of hits, but at least five different blog sites specifically quoting my line. No, I am not going to provide the urls, boy. but it got around some. Econospeak, where I blog, is not one of those. I did post on the matter at the time, but did not repeat the sharp quote, rather stuck to pointing out that Dixit and Fujita deserved to share the prize with him, something widely accepted by many leading international trade theorists and the vast majority of regional economists, and definitely those in Sweden in those fields, who told me that Paul treated King Gustav disrespectfully during their lunch. The method PK used was developed by Dixit and Stiglitz (latter already had his Nobel) in their 1977 AER paper, one of the 20 most cited AER papers of all time. And Fujita applied it to urban regional economics in a 1988 paper that did not get widely read as it was in semi-obscure Regional Science and Urban Economics, and highly mathematical with bad English, while Krugman’s 1991 paper that got all the attention and did what Fujiat’s had already done appeared in the top 5 JPE. I note that in effect Krugman sort of compensated Fujita by later coauthoring some things with him, especially a book with Venables, however I have spoken with Masa about the matter and he published another paper in RSUE where he politely pointed out how neither the Nobel Committee nor Krugman gave him the credit he deserved.

          Oh, I apologize for another error. The quote actually says “with no clothes” rather than “without clothes.” I am very terrible sorry.

          Now, “Moses Herzog,” where are those apologies you owe me?

  5. noneconomist

    I understand CoRev will be a speaker, and that his presentation will be repeated on Comedy Central.


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