Abstract: we build and estimate a model of exchange rate determination which allows for a survey data-motivated deviations from full information rational expectations (FIRE) at an individual level, where we show that survey exchange rate expectations are consistent with the average over-the-counter forex trader's positions while FIRE beliefs are not. We show that the model can explain a large fraction of the variation of medium/long run realized exchange rate changes, exchange rate survey data surprises and most of the expected exchange rate changes. Moreover, the estimated form of deviation from FIRE can explain exchange rate puzzles such as the "Dornbusch" overshooting puzzle, Forward Premium/Fama puzzle and the forecast revision regressions of Bordalo, Gennaioli, Ma, and Shleifer (2020).

Funding from the Algorand Fintech Lab is gratefully acknowleged

for further information contact patrizia.pellizzari@unibocconi.it