Equilibrium exchange rate theories make the assumption that the Real Equilibrium Exchange Rate (RER) is independent from internal equilibrium and economic policies. We develop a model in which economic policies depend on the minimisation of an intertemporal loss function, and we show that in a...

In this paper, we extend the Taylor rule model of exchange rate determination by incorporating the liquidity yield on government bonds and investigate exchange rate predictability. We find that the liquidity yield on government bonds delivers additional predictive power to future exchange rate...

Using firm-level data for 18 major global economies, we find that the exchange rate affects corporate investment through a financial channel: exchange rate depreciation dampens corporate investment through firm leverage and FX debt. These findings are consistent with the predictions of a...

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...

The optimal escape from a liquidity trap involves generating private-sector expectations of a higher future price level and higher future inflation. This lowers the real interest rate and reduces the recession during the liquidity trap. The problem, emphasized by Krugman, is that central-bank...

This paper argues that the stability of exchange rate pass-through is not well tested in common econometric specifications of pass-through equations. This is because (a) expected future exchange rate changes are an importnt omitted variable in these estimations, and (b) the use of aggregate data...

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...

This paper develops a model of inflation in an open economy. The model permits analysis of the susceptibility of open economies to permanent inflationary consequences arising from transitory foreign exchange shocks. Sources of structural vulnerability to such events are identified, and means of...

We examine the stability and strength of the relationship between exchange rates and trade over time using three alternative approaches, mitigating the endogeneity of the relation. We find that both exchange rate pass-through and the price elasticity of trade volumes are largely stable over...

The Taylor rule has become the dominant model for academic evaluation of out-of-sample exchange rate predictability. Two versions of the Taylor rule model are the Taylor rule fundamentals model, where the variables that enter the Taylor rule are used to forecast exchange rate changes, and the...