We lay out an empirical and a theoretical model to analyze the effects of non-fundamental exchange rate volatility on economic activity and welfare. In the first part of the paper, the GARCH-SVARmodel is applied to measure empirically the effect of the conditional exogenous exchange rate...

We estimate a multivariate unobserved components-stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US Dollar. The empirical model is based on the assumption that both countries' monetary policy strategies may be well described by Taylor rules with a...

A common finding in the international-economics literature is that the elasticity of substitution between domestically produced and imported goods is smaller in the short than in the long run. Despite this, most of today's commonly used macroeconomic models assume this elasticity to be constant....

We estimate a multivariate unobserved components-stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US dollar. The empirical model is based on the assumption that both countries' monetary policy strategies may be well described by Taylor rules with a...

I analyze the role of real and monetary shocks on the exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These...

We study the quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980-2005. We show that the two variables are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange...

This paper analyzes exchange rate behavior in a model where consumers trade goods to diversify shocks to their income. A model with traded and nontraded goods is simulated in a multilateral context based upon historical output correlations for the period 1970-92. Simulation results indicate that...

I propose a new explanation for the failure of Uncovered Interest Parity (UIP) that can rationalize not only the classic UIP puzzle, but also the evidence that the puzzle reverses direction at longer horizons. In the model, excess currency returns arise as compensation for endogenous...

This paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations. The paper first demonstrates in a two-country Dynamic Stochastic General Equilibrium (DSGE) model, that the home bias in consumption is important to duplicate the...

This paper proposes an explanation of the shifts in the volatility of exchange rate returns that relies on standard present value exchange rate models. Agents are uncertain about the true data generating model and deal with the model uncertainty by making inference on the models and their...