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Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand?

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Author Info
Lucio Sarno

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Abstract

This paper provides a selective overview of puzzles in exchange rate economics. We begin with the forward bias puzzle: high interest rate currencies appreciate when one might guess that investors would demand higher interest rates on currencies expected to fall in value. We then analyse the purchasing power parity puzzle: the real exchange rate displays no (strong) reversion to a stable long-run equilibrium level. Finally, we cover the exchange rate disconnect puzzle: the lack of a link between the nominal exchange rate and economic fundamentals. For each puzzle, we critically review the literature and speculate on potential solutions.

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File URL: http://economics.ca/cgi/xms?jab=v38n3/01.pdf
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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 38 (2005)
Issue (Month): 3 (August)
Pages: 673-708
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cje:issued:v:38:y:2005:i:3:p:673-708

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Related research
Keywords:

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Cynthia A. Lengnick-Hall & Robert J. Griffith, . "Knowledge Resources, Exploration, and Exploitation: A New Perspective on the Interplay Between Innovation and Application," Working Papers 0027, College of Business, University of Texas at San Antonio. [Downloadable!]
  2. Roger Bjørnstad and Eilev S. Jansen, 2007. "The NOK/euro exhange rate after inflation targeting: The interest rate rules," Discussion Papers 501, Research Department of Statistics Norway. [Downloadable!]
  3. Su Zhou & Mohsen Bahmani-Oskooee & Ali M. Kutan, 2008. "Purchasing Power Parity before and after the Adoption of the Euro," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 144(1), pages 134-150, April. [Downloadable!] (restricted)
  4. Leo Krippner, 2006. "A Yield Curve Perspective on Uncovered Interest Parity," Working Papers in Economics 06/16, University of Waikato, Department of Economics. [Downloadable!]
  5. Su Zhou, . "Stationarity of Asian-Pacific real exchange rates," Working Papers 0012, College of Business, University of Texas at San Antonio. [Downloadable!]
  6. Mohsen Bahmani-Oskooee & Abera Gelan, 2006. "Testing the PPP in the non-linear STAR Framework: Evidence from Africa," Economics Bulletin, Economics Bulletin, vol. 6(17), pages 1-15. [Downloadable!]
  7. Yu-chin Chen & Kwok Ping Tsang, 2009. "What Does the Yield Curve Tell Us About Exchange Rate Predictability?," Working Papers UWEC-2009-04, University of Washington, Department of Economics. [Downloadable!]
    Other versions:
  8. Huisman, R. & Mahieu, R.J. & Mulder, A., 2007. "Do Exchange Rates Move in Line With Uncovered Interest Parity?," Research Paper ERS-2007-012-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  9. Shabbir Ahmad & Abdul Rashid, 2008. "Non-linear PPP in South Asia and China," Economics Bulletin, Economics Bulletin, vol. 6(17), pages 1-6. [Downloadable!]
  10. Anella Munro, 2005. "UIP, Expectations and the Kiwi," Reserve Bank of New Zealand Discussion Paper Series DP2005/05, Reserve Bank of New Zealand. [Downloadable!]
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