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...

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...

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...

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...

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...

Previous assessments of nominal exchange rate determination have focused upon a narrow set of models typically of the 1970's vintage. The canonical papers in this literature are by Meese and Rogoff (1983, 1988), who examined monetary and portfolio balance models. Succeeding works by Mark (1995)...

We propose a new explanation for the forward-premium and the delayed-overshooting puzzles. Both puzzles arise from a systematic under-reaction of short-term interest rate forecasts to current innovations. Accordingly, the forward premium is always a biased predictor of future depreciation; the...

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...

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...

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...