Two well-known, but seemingly contradictory, features of exchange rates are thatthey are close to a random walk while at the same time exchange rate changesare predictable by interest rate differentials. In this paper we investigate whetherthese two features of the data may in fact be related....

While empirical evidence nds only a weak relationship between nominal exchangerates and macroeconomic fundamentals, forex markets participants often attribute ex-change rate movements to a macroeconomic variable. The variables that matter, how-ever, appear to change over time and some variable...

There is widespread evidence of excess return predictability in financial markets. In this paper we examine whether this predictability is related to expectational errors. To consider this issue, we use data on survey expectations of market participants in the stock market, the foreign exchange...

This paper offers empirical evidence that real exchange rate volatility can have a significant impact on the long-term rate of productivity growth, but the eect depends critically on a country's level of financial development. For countries with relatively low levels of financial development,...

The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward...

This paper presents a general equilibrium currency crisis model of the ’thirdgeneration’, in which the possibility of currency crises is driven by the in-terplay between private firms’ credit-constraints and nominal price rigidities.Despite our emphasis on microfoundations, the model remains...

Empirical evidence shows that macroeconomic fundamentals have little explanatory power for nominal exchange rates. On the other hand, the recent microstructure approach to exchange rates has shown that most exchange rate volatility at short to medium horizons is related to order flows. This...