Econometric analysis of present value models when the discount factor is near one

This paper develops asymptotic econometric theory to help understand data generated by a present value model with a discount factor near one. A leading application is to exchange rate models. A key assumption of the asymptotic theory is that the discount factor approaches one as the sample size grows. The finite sample approximation implied by the asymptotic theory is quantitatively congruent with the modest departures from random walk behavior that are typically found and with imprecise estimation of a well-studied regression relating spot and forward exchange rates.