Exchange rates, sunspots and cycles

Mauro Bambi () and Sara Eugeni

No 2018_05, Department of Economics Working Papers from Durham University, Department of Economics

Abstract: The empirical evidence on nominal exchange rate dynamics shows a long-run relationship of this variable with the fundamentals of the economy, although such relationship disappears at shorter horizons ("exchange rate disconnect" puzzle). This apparently contrasting behaviour of the nominal exchange rate can be explained in an overlapping-generations model where the two currencies are not perfect substitutes. In this framework, we show that the nominal exchange rate is pinned down by the fundamentals of the economy at the monetary steady state. However, uctuations of the nominal exchange rate around its long-run value, which are not driven by shocks to fundamentals, can emerge. Firstly, we prove the existence of endogenous (deterministic) business cycles in the nominal exchange rate. Secondly, we construct stationary sunspot equilibria where random uctuations of the nominal exchange rate arise as a result of self-ful lling beliefs.

Date: 2018-05
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.dur.ac.uk/resources/business/working-papers/EconWP18_05.pdf main text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

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:dur:durham:2018_05

Access Statistics for this paper

More papers in Department of Economics Working Papers from Durham University, Department of Economics Durham University Business School, Mill Hill Lane, Durham DH1 3LB, England. Contact information at EDIRC.
Bibliographic data for series maintained by Tatiana Damjanovic ().