In this paper we develop a model of the exchange rate. The existence of transactions costs introduces an important non-linearity. Agents have different beliefs about the future exchange rate. We show that this simple model creates great complexity in the market which is characterised by the fact...

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....

This paper investigates the presence of periodically collapsing rational bubbles in exchange rates for a sample of industrialised countries. A periodically collapsing rational bubble is defined as an explosive deviation from economic fundamentals with distinct expansion and contraction phases in...

Instead of focusing on the effect of exchange rate levels (undervalued or overvalued exchange rates) on international trade, this paper provides an analysis of the effects of exchange rate volatility levels on trade. High levels of exchange rate volatility can deter entrepreneurs from becoming...

We consider an economy under a fixed exchange rate system, but with bounds (a minimum level or a band) on the real exchange rate. The international price of the tradable good is characterized by the continuous arrival of shocks that change its level. In a model with microfoundations, we...

This mimeo discusses the importance of non-tradable goods prices in explaining real exchange rate movements. We try to reconcile the findings of Engel (1999) and Burstein et al (2006) that seem to provide very different conclusions regarding the decomposition of real exchange rate movements. The...

In this paper, I consider modeling the effects of the macroeconomic determinants on the nominal exchange rate to be channeled through the transition probabilities in a Markovian process. The model posits that the deviation of the exchange rate from its fundamental value alters the market's...

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...

This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing-to-market akin to those in Chari, et al. (2002) and Steinsson (2008) to illustrate the link between real exchange rate dynamics and what the...

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...