How much you know matters: A note on the exchange rate disconnect puzzle

This paper offers a dynamic model of the foreign exchange market where some investors in the market are more informed than others. By adjusting the proportion of informed investors in the market, it is shown that the disconnect between macroeconomic variables and the exchange rate is sensitive to the amount of asymmetric information in the market. A surprising fi�nding is that this disconnect is bigger when the proportion of informed investors in the market is smaller.