Risk and Exchange Rates

Maurice Obstfeld and Kenneth S Rogoff

No 6694, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops an explicitly stochastic new open economy macroeconomics' model, which can potentially be used to explore the qualitative and quantitative welfare differences between alternative exchange rate regimes. A crucial feature is that we do not simplify by assuming certainty equivalence for producer price setting behavior. Our framework also provides a sticky-price alternative to Lucas's (1982) exchage rate risk premium model. We show that the level risk premium' in the exchage rate is potentially quite large and may be an important missing fundamental in empirical exchange rate equations. As a byproduct analysis also suggests an intriguing possible explanation of the forward premium puzzle.

JEL-codes: F41 (search for similar items in EconPapers)
Date: 1998-08
Note: IFM
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Working Paper: Risk and Exchange Rate (1998)
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