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Solving exchange rate puzzles with neither sticky prices nor trade costs
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Moore, Michael J. and Roche, Maurice J. (2010) Solving exchange rate puzzles with neither sticky prices nor trade costs. Journal of International Money and Finance, Volume 29 (Number 6). pp. 1151-1170. doi:10.1016/j.jimonfin.2010.02.008 ISSN 02615606.
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Official URL: http://dx.doi.org/10.1016/j.jimonfin.2010.02.008
Abstract
We present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved. The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Habit persistence is modeled using Campbell Cochrane preferences with ‘deep’ habits along the lines of the work of Ravn, Schmitt-Grohe and Uribe. By deep habits, we mean habits defined over goods rather than countries. The model is simulated using the artificial economy methodology. It offers a neo-classical explanation of the Meese–Rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting. Finally, the model naturally generates the negative slope in the standard forward market regression.
| Item Type: | Journal Article | ||||||
|---|---|---|---|---|---|---|---|
| Subjects: | H Social Sciences > HG Finance | ||||||
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Library of Congress Subject Headings (LCSH): | Foreign exchange rates, Foreign exchange futures | ||||||
| Journal or Publication Title: | Journal of International Money and Finance | ||||||
| Publisher: | Elsevier BV | ||||||
| ISSN: | 02615606 | ||||||
| Official Date: | October 2010 | ||||||
| Dates: |
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| Volume: | Volume 29 | ||||||
| Number: | Number 6 | ||||||
| Number of Pages: | 19 | ||||||
| Page Range: | pp. 1151-1170 | ||||||
| DOI: | 10.1016/j.jimonfin.2010.02.008 | ||||||
| Status: | Peer Reviewed | ||||||
| Publication Status: | Published | ||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||
| Funder: | Ireland. Higher Education Authority, Economic and Social Research Council (Great Britain) (ESRC), Irish Research Council for the Humanities and Social Sciences (IRCHSS) | ||||||
| Grant number: | RES-000-22-2177 (ESRC) |
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