Exchange Rates, Natural Rates, and the Price of Risk

Rohan Kekre and Moritz Lenel

No 32976, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the source of exchange rate fluctuations using a general equilibrium model accommodating shocks in goods and financial markets. These shocks differ in their induced comovements between exchange rates, interest rates, and quantities. A calibration matching data from the U.S. and G10 currency countries implies that persistent shocks to relative demand, reflected in persistent interest rate differentials, account for 75% of the variance in the dollar/G10 exchange rate. Shocks to currency intermediation are important, however, in generating deviations from uncovered interest parity at high frequencies and explaining the dollar appreciation in crises.

JEL-codes: E44 F31 G15 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-ifn, nep-mon and nep-opm
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