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A New Micro Model of Exchange Rate Dynamics (March 2004)

Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business) ()
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Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business): Department of Economics, Georgetown University, http://www9.georgetown.edu/faculty/evansm1/

Authors registered in the RePEc Author Service: Richard K. Lyons () and Martin Evans ()

Working Papers from Georgetown University, Department of Economics

Abstract: We address the puzzle of what determines exchange rates by examining information aggregation in a dynamic general equilibrium (DGE) setting. Unlike other DGE macro models, which enrich either preference structures or production structures, our model enriches the information structure. The model departs from microstructure-style modeling by identifying real activities where dispersed information originates, as well as the technology by which information is subsequently aggregated and impounded. Results relevant to the determination puzzle include: (1) persistent gaps between exchange rates and fundamentals, (2) excess volatility relative to fundamentals, (3) exchange rate movements without macro news, (4) little or no exchange rate movement when macro news occurs, and (5) a structural rationale for why transaction flows perform well in accounting for monthly exchange rate changes, whereas macro variables perform poorly.

Keywords: Exchange Rates; Dispersed Information; General Equilibrium; Microstructure. (search for similar items in EconPapers)
Date: 2005-05-04
New Economics Papers: this item is included in nep-ifn
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