Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?

Philippe Bacchetta and Eric van Wincoop

American Economic Review, 2006, vol. 96, issue 3, 552-576

Abstract: Empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables. We introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence, the model implies that (a) observed fundamentals account for little of exchange rate volatility in the short to medium run, (b) over long horizons, the exchange rate is closely related to observed fundamentals, (c) exchange rate changes are a weak predictor of future fundamentals, and (d) the exchange rate is closely related to order flow. (JEL F3, F4, G0, G1, E0)

Date: 2006
Note: DOI: 10.1257/aer.96.3.552
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Citations: View citations in EconPapers (324)

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Related works:
Working Paper: Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle? (2004)
Working Paper: Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle? (2003)
Working Paper: Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle? (2003)
Working Paper: Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle? (2003)
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