Both empirical evidence and theoretical discussion has long emphasized the impact of 'news' on exchange rates. In most exchange rate models, the exchange rate acts as an asset price, and as such responds to news about future returns on assets. But the exchange rate also plays a role in...

A classic argument for flexible exchange rates is that the exchange rate plays a 'shock-absorber' role in an open economy vulnerable to country-specific shocks. This paper presents a sharp counter-example to this argument within a very conventional open economy model. Countries are subject to...