We relate the risk characteristics of currencies to measures of physical, cultural, and institutional distance. The currencies of countries which are more distant from other countries are more exposed to systematic currency risk. This is due to a gravity effect in the factor structure of...

The depreciation rate is often computed as the ratio of foreign and domestic pricing kernels. Using bond prices alone to estimate these kernels leads to currency puzzles: the inability of models to match violations of uncovered interest parity and the volatility of exchange rates. One cannot use...

In a one-period model where each investor consumes a single good, and where borrowing and lending are private and real, there is a universal constant that tells how much each investor hedges his foreign investments. The constant depends only on average risk tolerance across investors. The same...

The New Open Economy Macroeconomics has allowed economists to tackle classical problems with new tools, while also generating new ideas and questions. In their attempts to make the new models capture empirical regularities, researchers have entertained a variety of assumptions about the...

In this paper we develop a general equilibrium model of exchange rates where expectations of future variables directly affect the current exchange rate through an 'asset-market' term. This term, which results from the assumptions of incomplete asset markets and segmented product markets, does...

In veiw of recent strong evidence that substantial sterilization of the monetary effects of reserve flows occurs, a modified monetary approach model is formulated in which central banks exercise no control over their domestic money supply despite their sterilization activities. This model is...

Standard models of exchange rates, based on macroeconomic variables such as prices, interest rates, output, etc., are thought by many researchers to have failed empirically. We present evidence to the contrary. First, we emphasize the point that "beating a random walk" in forecasting is too...

We explore the interaction between exchange rates, institutional investor currency flows and exchange-rate fundamentals. We find that these flows are highly correlated with contemporaneous and lagged exchange rate changes, and that they carry information for future excess currency returns. This...

Many monetary and fiscal policy decision makers and economists hold the view that exchange rates are volatile even though nominal exchange rates vary less than many other financial market prices and yields. This paper seeks an explanation for this puzzle by contrasting exchange rate dynamics in...

We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such...