This paper investigates the relationships between the degree of price stickiness (inflexibility), the variability of output, and that of the real exchange rate in an open economy under flexible exchange rates and capital mobility. We show that there exists, in general, a critical degree of price...

According to the most common understanding, currency crises are always and everywhere a monetary phenomenon. Based on a formal theoretical model and ample empirical evidence, this article argues instead that currency crises are always and everywhere about external imbalances. They are usually...

This paper presents a survey of two basic puzzles in international finance. The first puzzle is the `predictable excess return puzzle.' The returns on foreign currency deposits relative to domestic currency deposits should be equalized based upon uncovered interest parity. However, not only do...

The foreign exchange market efficiency hypothesis is the proposition that prices fully reflect information available to market participants, i.e. hedged interest-arbitrageurs and speculators, and there are no opportunities for the hedgers or the speculators to make super-normal profits, i.e....