How Long the Dollar Upswing?

One of the seminal empirical exchange rate papers is Charles Engel‘s and Jim Hamilton‘s “Long swings in the exchange rate: are they in the data and do markets know it?” (AER, 1990). Think about it – while one often can’t reject the null hypothesis of a random walk in the exchange rate (using typically low-powered tests), the typical floating exchange rate sure doesn’t look like a random walk. What does a Markov switching model applied to the US broad trade weighted real value of the US dollar (instead of bilateral against Deutsche mark, French franc, British pound).

A switching model estimated over the 1973Q1-2022Q3 period indicates the dollar falls 4.1% during depreciation regimes, and rises 5.8% during appreciation regimes. Figure 1 displays on top panel the log real dollar value, and in middle (bottom) panel, the probability of being a depreciating (appreciating) regime. [Markov switching model, 2 regimes, same variance in two regimes.]

Figure 1: Top panel, log real value of broad trade weighted dollar (black), 2006M01=0; Middle panel: probability of being in depreciating regime (blue), NBER peak-to-trough recession dates shaded gray; Bottom panel: probability of being in appreciating regime (blue). Red dashed line at 50%. Probabilities are smoothed and filtered. Source: Federal Reserve Board (goods export weighted through 2015, goods and services export weighted 2016 and onward), NBER, and author’s calculations.

Using a 50% threshold, the dollar has been in an appreciating regime since 2021Q2. The probability of staying in an appreciating regime when in an appreciating regime is 81%, while the probability of transitioning to a depreciating regime from an appreciating regime is only 15%.

The expected duration of regime 2 (appreciating) is 5.23 quarters. If the appreciating regime has been in place since 2021Q2, then a switch to depreciation would not be surprising. However, the model I’ve estimated does not ascribe a higher likelihood to a switch the longer one is in a given regime.


Update, 11/6/2022:

I’m reminded also Cheung and Erlandsson (JBES, 2012).


7 thoughts on “How Long the Dollar Upswing?

  1. ltr

    October 31, 2022

    China launches lab module Mengtian as space station approaches completion

    WENCHANG, Hainan — China on Monday launched the space lab module Mengtian, taking the construction of the country’s space station Tiangong into final stage.

    Mengtian, Tiangong’s second lab module now flying to join the two-module combination already about 400 km above Earth, is the last “building block” that allows Tiangong to form a T-shape structure, the planned layout at the space station’s completion.

    The new combination is projected to take shape after a succession of elaborately-maneuvered tasks including the docking and the subsequent in-orbit transposition.

    The Long March-5B Y4 carrier rocket, carrying Mengtian, blasted off from the Wenchang Spacecraft Launch Site on the coast of the southern island province of Hainan at 3:37 p.m. (Beijing Time), according to the China Manned Space Agency (CMSA).

    About eight minutes later, Mengtian separated from the rocket and entered its preset orbit. The CMSA declared the launch a complete success.

    This is the 25th flight mission since the country’s manned space program was approved and initiated in 1992.

    The building of Tiangong into a national space laboratory with three modules marks a milestone in China’s three-decade effort to advance its manned space program.


    The 17.88-meter-long new module has a takeoff mass of about 23 tonnes. Consisting of a work cabin, a cargo airlock cabin, a payload cabin and a resource cabin, it is the heaviest single-cabin active spacecraft in orbit in the world right now.

    The core module Tianhe combined with the Wentian lab module took on an L shape after the latter was moved at the end of September to park at a side port of the core module’s node cabin, vacating the front docking port for Mengtian’s berthing.

    One of the challenges of Mengtian’s docking task is a consequence of its relatively big orbital angle with the sun, which reduces the solar panel’s energy production, said Song Xiaoguang, a designer of Tiangong’s Guidance, Navigation and Control (GNC) subsystem.

    “The docking must be completed within a limited period, otherwise it has to be halted and the solar arrays be adjusted to receive more sunlight,” said Song. “To dock with an asymmetric structure with a tilted barycenter is also challenging,” he added….

  2. pgl

    I noted a totally tasteless comment from Donald Trump Jr. on the vicious attack on Paul Pelosi. Well it looks like the little creep outdid himself:

    In the aftermath of the attack on Paul Pelosi, amid rising concern over rightwing figures stoking violence against political opponents, Donald Trump Jr posted online a crude meme featuring a hammer, the weapon used to attack the husband of the House speaker, Nancy Pelosi, on Friday. “OMG,” the former president’s son wrote next to the picture, which also had the caption “Got my Paul Pelosi Halloween costume ready”. The internet backlash was swift but Trump Jr, a full-time provocateur and surrogate for his father, doubled down equally swiftly – posting another, this time clearly homophobic, meme which appears to reference a baseless conspiracy theory about the assault.

    I get his daddy is a racist demagogue who wanted to destroy our Republic but damn this kid deserves to have his body parts removed SLOWLY.

    1. Anonymous

      trump is back on twitter!

      how do you get a bathroom break in the middle of a hammer fight?, and then go back out to fight it out?

  3. Anonymous

    the models are interesting.

    m. el erian stated it more directly, the $ is the ‘least ugly house on the block’.

    for now.

  4. Barkley Rosser

    I agree that the Engel-Hamilton paper was a very important one, and one that does not get all that much attention. It is certainly a part of undermining the actual power of the random walk model, even though the random walk model long did very well against most models based on international macro, although, Menzie, I know that more recently you and some others have managed to come up with some models based on theory that manage to do at least a bit better than random walk.

    But the big joke about thar oriiginal power of the random walk by Meese and Rogoff was that it still was not all that powerful, a subtext not regularly noticed. Forex rates indeed remain tough to model and forecast.

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