In this paper we study the role of the exchange rate in conducting monetary policy in an economy with near-zero nominal interest rates as experienced in Japan since the mid-1990s. Our analysis is based on an estimated model of Japan, the United States and the euro area with rational expectations...

The inability to reconcile observed levels of foreign exchange rate volatility with predictions derived from rational expectations models represents one of the most persistent challenges in international finance. This paper shows that such excess volatility puzzles arise from informational...