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Exchange Rate Models are Better than You Think, and Why They Didn't Work in the Old Days

Engel, Charles; Wu, Steve P. Y. - National Bureau of Economic Research - 2024

Exchange-rate models fit very well for the U.S. dollar in the 21st century. A "standard" model that includes real interest rates and a measure of expected inflation for the U.S. and the foreign country, the U.S. comprehensive trade balance, and measures of global risk and liquidity demand is...

Persistent link: https://www.econbiz.de/10015056131

Exchange Rate Determination under Limits to CIP Arbitrage

Bacchetta, Philippe; Davis, Scott; Van Wincoop, Eric - National Bureau of Economic Research - 2024

Recent theories of exchange rate determination have emphasized limited UIP arbitrage by international financial institutions. New regulations since 2008 have also lead to imperfect CIP arbitrage. We show that under limited CIP arbitrage the exchange rate and CIP deviation are jointly determined...

Persistent link: https://www.econbiz.de/10015056203

A New Micro Model of Exchange Rate Dynamics

Evans, Martin D.D. - 2004

We address the exchange rate determination puzzle by examining how information is aggregated in a dynamic general equilibrium (DGE) setting. Unlike other DGE macro models, which enrich either preference structures or production structures, our model enriches the information structure. The model...

Persistent link: https://www.econbiz.de/10012468314

Taking the Cochrane-Piazzesi Term Structure Model Out of Sample : More Data, Additional Currencies, and FX Implications

Hodrick, Robert J. - 2018

We examine the Cochrane and Piazzesi (2005, 2008) model in several out-of-sample analyzes. The model's one-factor forecasting structure characterizes the term structures of additional currencies in samples ending in 2003. In post-2003 data one-factor structures again characterize each currency's...

Persistent link: https://www.econbiz.de/10012480743

International Yield Curves and Currency Puzzles

Chernov, Mikhail - 2018

The depreciation rate is often computed as the ratio of foreign and domestic pricing kernels. Using bond prices alone to estimate these kernels leads to currency puzzles: the inability of models to match violations of uncovered interest parity and the volatility of exchange rates. One cannot use...

Persistent link: https://www.econbiz.de/10012480858

International Liquidity and Exchange Rate Dynamics

Gabaix, Xavier - 2014

We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets … theory of exchange rate determination in imperfect financial markets not only helps rationalize the empirical disconnect …

Persistent link: https://www.econbiz.de/10012458810

Exchange rate dynamics revisited

de Macedo, Jorge Braga - 2013

Many monetary and fiscal policy decision makers and economists hold the view that exchange rates are volatile even though nominal exchange rates vary less than many other financial market prices and yields. This paper seeks an explanation for this puzzle by contrasting exchange rate dynamics in...

Persistent link: https://www.econbiz.de/10012458945

Econometric Analysis of Present Value Models When the Discount Factor Is near One

West, Kenneth D. - 2012

This paper develops asymptotic econometric theory to help understand data generated by a present value model with a … discount factor near one. A leading application is to exchange rate models. A key assumption of the asymptotic theory is that … theory is quantitatively congruent with modest departures from random walk behavior with imprecise estimation of a well …

Persistent link: https://www.econbiz.de/10012460413

Exchange Rate Models Are Not as Bad as You Think

Engel, Charles - 2007

Standard models of exchange rates, based on macroeconomic variables such as prices, interest rates, output, etc., are thought by many researchers to have failed empirically. We present evidence to the contrary. First, we emphasize the point that "beating a random walk" in forecasting is too...

Persistent link: https://www.econbiz.de/10012465332

Expectations and Exchange Rate Policy

Devereux, Michael B. - 2006

Both empirical evidence and theoretical discussion have 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...

Persistent link: https://www.econbiz.de/10012466455