A new micro model of exchange rate dynamics
By: Martin D.D. Evans, Richard K. Lyons.
Contributors: Lyons, Richard K.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10379; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10379.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Foreign exchange rates -- Econometric models.
Description: "We address the exchange rate determination puzzle by examining how information is aggregated in a dynamic general equilibrium (DGE) setting.  Unlike other DGE macro models, which enrich either preference structures or production structures, our model enriches the information structure.  The model departs from microstructure-style modeling by identifying the real activities where dispersed information originates, as well as the technology by which information is subsequently aggregated and impounded.  Results relevant to the determination puzzle include: (1) Persistent gaps between exchange rates and macro fundamentals, (2) Excess volatility relative to macro fundamentals, (3) Exchange rate movements without macro news, (4) Little or no exchange rate movement when macro news occurs, and (5) A structural-economic rationale for why transaction flows perform well in accounting for monthly exchange rate changes, whereas macro variables perform poorly.  Though past micro analysis has made progress on results (1) through (3), results (4) and (5) are new.  Excess volatility arises in our model for a new reason: rational exchange rate errors feed back into the fundamentals that the exchange rate is trying to track"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
Title from PDF file as viewed on 1/14/2005.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.