It is well known that the extent of pass-through of exchange rate changes to consumer prices is much lower than to import prices. One explanation is local distribution costs. Here we consider an alternative, complementary explanation based on the optimal pricing strategies of firms. We consider...

The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future exchange rates than a linear combination of macroeconomic fundamentals. This result is behind the famous Meese-Rogoff puzzle. In this paper we evaluate whether parameter...

While the 2008-2009 financial crisis originated in the United States, we witnessed steep declines in output, consumption and investment of similar magnitudes around the globe. This raises two questions. First, given the observed strong home bias in goods and financial markets, what can account...

Recent episodes (October 2008, May 2010, August 2011) have witnessed huge spikes in equity price risk (implied volatility). Apart from their large size, several features characterize these risk panics. They are global phenomena, shared among a broad set of countries. There is substantial...

It is well known from anecdotal, survey and econometric evidence that the relationship between the exchange rate and macro fundamentals is highly unstable. This could be explained when structural parameters are known and very volatile, neither of which seems plausible. Instead we argue that...

Nominal assets play a major role in international financial markets, while trade in indexed bonds is not empirically relevant. As a result, agents are generally exposed to both price and exchange rate uncertainty. Nonetheless, previous research on net capital flows has assumed the presence of a...

Empirical evidence shows that macroeconomic fundamentals have little explanatory power for nominal exchange rates. 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 flows....

While empirical evidence finds only a weak relationship between nominal exchange rates and macroeconomic fundamentals, forex markets participants often attribute exchange rate movements to a macroeconomic variable. The variables that matter, however, appear to change over time and one variable...

Two well-known, but seemingly contradictory, features of exchange rates are that they are close to a random walk while at the same time exchange rate changes are predictable by interest rate differentials. In this paper we investigate whether these two features of the data may in fact be...

There is widespread evidence of excess return predictability in financial markets. In this paper we examine whether this predictability is related to expectational errors. To consider this issue, we use data on survey expectations of market participants in the stock market, the foreign exchange...