Short-run Exchange-Rate Dynamics: Theory and Evidence

John Carlson, Christian Dahl and Carol Osler

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Recent research has revealed a wealth of information about the microeconomics of currency markets and thus the determination of exchange rates at short horizons. This information is valuable to us as scientists since, like evidence of macroeconomic regularities, it can provide critical guidance for designing exchange-rate models. This paper presents an optimizing model of short-run exchange-rate dynamics consistent with both the micro evidence and the macro evidence, the first such model of which we are aware. With respect to microeconomics, the model is consistent with the institutional structure of currency markets, it accurately reflects the constraints and objectives faced by the major participants, and it fits key stylized facts concerning returns and order flow. With respect to macroeconomics, the model is consistent with most of the major puzzles that have emerged under floating rates.

Keywords: Exchange-rate dynamics; currency market microstructure (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Pages: 56
Date: 2008-01-07
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Short-run Exchange-rate Dynamics: Theory And Evidence (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2008-01

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