Market microstructure and the imperfect common knowledge literature in macroeconomics both analyze the effect of dispersed information on prices. This paper draws on both sources to understand exchange rate forecasting errors. A theoretical model is developed showing that forecasting errors...

This paper argues that order flow can explain exchange rate forecasting errors. A unified theoretical model is developed showing that forecasting errors can be explained by both informational rigidities and portfolio shifts. This is applied to Brazilian data using a unique data set of daily...