publication . Article . External research report . Research . 2016

A Possible Explanation of the ‘Exchange Rate Disconnect Puzzle’: A Common Solution to Three Major Macroeconomic Puzzles?

Horioka, Charles Yuji; Ford, Nicholas;
Open Access English
  • Published: 13 Jul 2016 Journal: AGI Working Paper Series = AGI Working Paper Series, volume 2016-15, pages 1-5
Abstract
Meese and Rogoff (1983) and subsequent studies find that economic fundamentals are apparently not able to explain exchange rate movements, but we argue that this so-called "Exchange Rate Disconnect Puzzle" arose because researchers such as Meese and Rogoff (1983) did not use the right fundamentals and because they did not allow for the forward-looking nature of exchange rate determination. Further, because they apparently were not aware that financial markets by themselves could not equalise interest rates across countries, they did not properly appreciate that the exchange rate is strongly influenced by agents' expectations of aggregated differences in local re...
Subjects
free text keywords: F21, F31, F32, F36, G15, Feldstein-Horioka puzzle or paradox, Exchange Rate Disconnect Puzzle, exchange rate determination, exchange rate volatility, Feldstein‐Horioka puzzle or paradox, financial market integration, goods market integration, international capital flows, international capital mobility, net transfers of capital, PPP puzzle, purchasing power parity puzzle, real interest rate equalisation, real interest rate parity, F21, F31, F32, F36, G15, Macroeconomics, Exchange rate, Monetary economics, Financial market, Economics, Financial capital, Interest rate parity, Real interest rate, Interest rate, media_common.quotation_subject, media_common, ddc:330
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publication . Article . External research report . Research . 2016

A Possible Explanation of the ‘Exchange Rate Disconnect Puzzle’: A Common Solution to Three Major Macroeconomic Puzzles?

Horioka, Charles Yuji; Ford, Nicholas;