Exchange Rate Disconnect Redux
Ryan Chahrour,
Vito Cormun,
Pierre De Leo (),
Pablo Guerron and
Rosen Valchev
No 1041, Boston College Working Papers in Economics from Boston College Department of Economics
Abstract:
We find that variation in expected US productivity explains more than half of G6 exchange rate fluctuations vis-a-vis the USD. Both correctly-anticipated changes in productivity and expectational “noise”, which influences expected productivity but never its realization, play an important role in driving exchange rates. Together, these disturbances account for many unconditional exchange rate patterns, including predictable excess returns, low Backus-Smith correlations, and excess volatility. Our findings suggest these famous puzzles share a common empirical origin, one that is very much connected to (expected) fundamentals. All of these findings can be rationalized by a model in which excess currency returns are driven by endogenously-fluctuating bond convenience yields. This mechanism makes additional predictions about government debt dynamics that prove true in the data.
Keywords: Exchange Rate Disconnect; TFP News; Excess Returns; Excess Volatility (search for similar items in EconPapers)
JEL-codes: D8 F3 G1 (search for similar items in EconPapers)
Date: 2021-11-05
New Economics Papers: this item is included in nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://fmwww.bc.edu/EC-P/wp1041.pdf main text (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:1041
Access Statistics for this paper
More papers in Boston College Working Papers in Economics from Boston College Department of Economics Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F Baum ().