Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and...

With many emerging market currencies tied to the U.S. dollar either implicitly or explicitly, movements in the exchange values of the currencies of major countries have the potential to influence the competitive position of many developing countries. According to some analysts, establishing...

This paper addresses the puzzle of regime-dependent volatility in foreign exchange. We extend the literature in two ways. First, our microstructural model provides a qualitatively new explanation for the puzzle. Second, we test implications of our model using Europe's recent shift to rigidly...

This paper reconsiders the determinants of the exchange rate by studying the historical episode after the fall of the Iron Curtain. Testing a modified portfolio balance model, we attribute the strength of the deutschmark in the early nineties and the puzzling decline of the euro during its...

The central puzzle in international business cycles is that real exchange rates are volatile and persistent. The most popular story for real exchange rate fluctuations is that they are generated by monetary shocks interacting with sticky goods prices. We quantify this story and find that it can...

In this paper we develop an empirical model of exchange rates in a target zone. The model is general enough to nest most theoretical and empirical models in the existing literature. We find evidence of two types of jumps in exchange rates. Realignment jumps are those that are associated with the...

Exchange rates of currencies in the Exchange Rate Mechanism of the EMS are characterized by long periods of stability interrupted by periods of extreme volatility. The periods of volatility appear at times of realignments of the central parities and at times when the exchange rate is within the...

The stability of the EMS depends crucially on realignment expectations of the market participants. In this paper we discuss how to measure such expectations and how to relate them to economic fundamentals, central bank reputation, and institutional arrangements of the EMS. We find the following...

History provides us with many examples of multiple country fixed exchange rate regimes that have eventually fallen apart. In light of these failures, why has the EMS been so successful in stabilizing exchange rates among members, and in expanding its membership? This paper argues that one key...

Today's value of the private ECU is driven by expectations that a European monetary authority will at some future date declare itself willing to convert the private ECU into the official basket at par. Until then, its value is not limited by any existing institutional arrangements in the...