Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?
Empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables. We introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence, the model implies that (a) observed fundamentals account for little of exchange rate volatility in the short to medium run, (b) over long horizons, the exchange rate is closely related to observed fundamentals, (c) exchange rate changes are a weak predictor of future fundamentals, and (d) the exchange rate is closely related to order flow. (JEL F3, F4, G0, G1, E0)
Year of publication: |
2006
|
---|---|
Authors: | Bacchetta, Philippe ; Wincoop, Eric Van |
Published in: |
American Economic Review. - American Economic Association - AEA. - Vol. 96.2006, 3, p. 552-576
|
Publisher: |
American Economic Association - AEA |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Net capital flows under exchange rate and price volatility
Bacchetta, Philippe, (1994)
-
Capital flows to emerging markets : liberalization, overshooting, and volatility
Bacchetta, Philippe, (1998)
-
Does exchange rate stability increase trade and capital flows?
Bacchetta, Philippe, (1998)
- More ...