In this paper we develop a general equilibrium model of exchange rates where expectations of future variables directly affect the current exchange rate through an 'asset-market' term. This term, which results from the assumptions of incomplete asset markets and segmented product markets, does...

This paper improves on current treatment of exchange rate variation in quantitative trade models. Exchange rate changes with heterogeneous passthrough to buyers are embedded in the structural gravity model. Quantification on two digit annual bilateral trade data reveals real effects of exchange...

We document five novel facts about Uncovered Interest Parity (UIP) deviations vis-à-vis the U.S. dollar for 34 currencies of advanced economies and emerging markets, using survey data on expected exchange rate. First, the UIP premium co-moves with global risk perception (VIX) for all...

The Mussa (1986) puzzle is the observation of a sharp and simultaneous increase in the volatility of both nominal and real exchange rates following the end of the Bretton Woods System of pegged exchange rates in 1973. It is commonly viewed as a central piece of evidence in favor of monetary...

We show that the exchange rate may appreciate or depreciate depending on the specific mix of sanctions imposed, even if the underlying equilibrium allocation is the same. Sanctions that limit a country's imports tend to appreciate the country's exchange rate, while sanctions that limit exports...

In the past fifteen years key exchange rates have moved in larger and more persistent ways than advocates of flexible rates in the late 1960s would have left anyone free to imagine. Certainly there was no expectation of constancy for nominal exchange rates. But real exchange rate movements of 30...

This paper discusses the dynamic behavior of exchange rates, focusing both on the exchange rate's response to exogenous shocks and the relation between exchange-rate movements and movements in important endogenous variables such as prices, interest rates, output, and the current account. Aspects...

Theoretical and empirical research completed over the last decade has dramatically increased our understanding of exchange rate behavior. The major insight to come from this decade of research is that foreign exchange is a financial asset. In an asset pricing framework, current exchange rates...

In this paper we estimate and compare several alternative exchange rate models that have received wide attention, but little comparison, during the 1970s. In order to compare purchasing power parity (PPP), nominal interest rate parity, real interest rate parity, and portfolio balance models, we...

In this paper we analyze the determinants of the evolution of ex- change rates within the context of alternative models of exchange rate dynamics. We examine the overshooting hypothesis in models which emphasize differential speeds of adjustment in asset and goods markets as well as in models...