Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment

Philippe Bacchetta and Eric van Wincoop

No 26259, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The objective of this paper is to show that the proposal by Froot and Thaler (1990) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all targeted moments related to these puzzles.

JEL-codes: F3 F31 F41 G11 G12 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-dge, nep-mon and nep-opm
Note: IFM
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Citations: View citations in EconPapers (8)

Published as Philippe Bacchetta & Eric van Wincoop, 2021. "Puzzling exchange rate dynamics and delayed portfolio adjustment," Journal of International Economics, vol 131.

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Related works:
Journal Article: Puzzling exchange rate dynamics and delayed portfolio adjustment (2021)
Working Paper: Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment (2019)
Working Paper: Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment (2019)
Working Paper: Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment (2018)
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