A New Micro Model of Exchange Rate Dynamics

Martin Evans and Richard Lyons ()

No 10379, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We address the exchange rate determination puzzle by examining how information is aggregated 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 the 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 macro fundamentals, (2) excess volatility relative to macro fundamentals, (3) exchange rate movements without macro news, (4) little or no exchange rate movement when macro news occurs, and (5) a structural-economic rationale for why transaction flows perform well in accounting for monthly exchange rate changes, whereas macro variables perform poorly. Though past micro analysis has made progress on results (1) through (3), results (4) and (5) are new. Excess volatility arises in our model for a new reason: rational exchange rate errors feed back into the fundamentals that the exchange rate is trying to track.

JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2004-03
New Economics Papers: this item is included in nep-fin and nep-ifn
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

Published as Evans, Martin D. D. and Richard K. Lyons. "Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting," American Economic Review, 2005, v95(2,May), 405-414.

Downloads: (external link)
http://www.nber.org/papers/w10379.pdf (application/pdf)

Related works:
Working Paper: A New Micro Model of Exchange Rate Dynamics (2004)
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:nbr:nberwo:10379

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w10379

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().