Exchange Rate Puzzles : A Review of the Recent Theoretical and Empirical Developments

This paper presents a comprehensive literature review of the theoretical and empirical developments that have taken place over the last two decades in an attempt to address the exchange rate puzzles. Specifically, it discusses the nonlinear and Bayesian econometric techniques, dynamic general equilibrium models, and the market microstructure approach that have been designed to address the three exchange rate puzzles, namely, the Purchasing Power Parity (PPP) puzzle, the exchange rate disconnect puzzle and the exchange rate determination puzzle. The paper concludes that the exchange rate puzzles are likely to be less puzzling, if researchers decide to move to nonlinear econometric frameworks and micro-founded general equilibrium models