Speculative behavior of foreign exchange rates during the current float

Abstract

The current regime of floating exchange rates has been characterized by a number of informed observers as economically unsatisfactory. Use of terms such as "overshooting", "bandwagon effects", "destabilizing", and "insufficient speculation" reflects serious misgivings on the part of many toward the long-run viability of a floating, rather than a fixed or semi-fixed, rate regime. Using fairly standard procedures, the authors have attempted to determine the extent to which the foreign exchange market exhibits the adverse features noted above. The authors conclude that by and large foreign exchange markets have not performed particularly poorly. The foreign exchange markets seem to be efficient at least in the weak form sense. Past exchange rate changes are not useful in predicting future exchange rate changes. This empirical finding contrasts sharply with the view that the markets "overshoot", or that there are "bandwagon effects", or that the amount of price stabilizing speculation is inadequate. © 1978.