Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/128023 
Year of Publication: 
2003
Series/Report no.: 
Working Paper No. 03.02
Publisher: 
Swiss National Bank, Study Center Gerzensee, Gerzensee
Abstract: 
Empirical evidence shows that observed macroeconomic fundamentals have little explanatory power for nominal exchange rates (the exchange rate determination puzzle). On the other hand, the recent "microstructure approach to exchange rates" has shown that most exchange rate volatility at short to medium horizons is related to order flow. In this paper we introduce symmetric information dispersion about future fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence the model implies that (i) observed fundamentals account for little of exchange rate volatility in the short to medium run, (ii) over long horizons the exchange rate is closely related to observed fundamentals, (iii) exchange rate changes are a weak predictor of future fundamentals, and (iv) the exchange rate is closely related to order flow over both short and long horizons.
Document Type: 
Working Paper

Files in This Item:
File
Size
280.19 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.