Exchange rate disconnect in general equilibrium

Oleg Itskhoki and Dmitry Mukhin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We propose a dynamic general equilibrium model of exchange rate determination that accounts for all major exchange rate puzzles, including Meese-Rogoff, Backus-Smith, purchasing power parity, and uncovered interest rate parity puzzles. We build on a standard international real business cycle model with home bias in consumption, augmented with shocks in the financial market that result in a volatile near-martingale behavior of exchange rates and ensure their empirically relevant comove-ment with macroeconomic variables, both nominal and real. Combining financial shocks with conventional productivity and monetary shocks allows the model to reproduce the exchange rate disconnect properties without compromising the fit of the business cycle moments.

JEL-codes: F3 G3 J1 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2021-08-01
New Economics Papers: this item is included in nep-dem, nep-dge, nep-fdg, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (25)

Published in Journal of Political Economy, 1, August, 2021, 129(8), pp. 2183 - 2232. ISSN: 0022-3808

Downloads: (external link)
http://eprints.lse.ac.uk/112140/ Open access version. (application/pdf)

Related works:
Journal Article: Exchange Rate Disconnect in General Equilibrium (2021)
Working Paper: Exchange Rate Disconnect in General Equilibrium (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:112140

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