Simple inflation targets may be supplemented with an escape clause to be evoked in case the economy is hit by a major supply shock. In this paper, consistent solutions to the Flood and Isard (1990) escape clause model are derived in the spirit of Lohmann (1990). She showed that Flood and Isard's...

In an extended Balassa–Samuelson model, long-run real exchange rates are determined by relative productivity and terms of trade. We present evidence of systematic long-run relationships between these fundamental variables and real exchange rates in a data set covering 15 OECD countries...

Out-of-sample forecasting accuracy is a frequently used criterion for evaluating models of exchange rate determination. This paper shows that both UIP and PPP produce better exchange rate forecasts at the ten-year horizon than a random walk without drift. There are two novelties relative to...

The floating of a number of European currencies in 1992-93 created a new body of data on foreign exchange risk premia, or deviations from uncovered interest rate parity (UIP). In this paper, excess returns to investments in SEK, NOK, FIM, GBP, ITL and ESP against the DEM are investigated. First,...

In an attempt to move beyond the purchasing power parity hypothesis, this paper addresses two issues. The first concerns the causes of movements in real exchange rates. In contrast to the typical result, supply shocks are found to dominate the long-run variance decompositions for each of the...

Data on short investments in Swedish long-term bonds as the bonds mature contains unusually rich information about the relationship between duration and the first and second moments of bond returns. We identify three different channels through which duration affects bond returns. The liquidity...

The empirical failure of uncovered interest parity (UIP) is one of the best-established facts of international economics. The exchange rates of countries with high nominal interest rates tend to appreciate rather than depreciate as expected from UIP. However, virtually every published test of...

Long run purchasing power is tested on 16 OECD countries using data from 1960 to 1994, PPP is rejected for some countries (Canada, Japan, Switzerland, Austria, Italy and Spain) and not rejected for other (Sweden, France, Holland and the United Kingdom). For the latter countries, impulse response...

If floating exchange rates stabilize shocks rather than create shocks, a country that joins a monetary union or fixes its exchange rate looses a stabilizing mechanism. We use a first difference structural VAR on trade weighted macroeconomic data to study the role of floating exchange rates for...