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Foreign exchange: macro puzzles, micro tools

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  • Richard K. Lyons

Abstract

This paper reviews recent progress in applying information-theoretic tools to long-standing exchange rate puzzles. I begin by distinguishing the traditional public information approach (e.g. monetary models, including new open economy models) from the newer dispersed information approach. (The latter focuses on how information is aggregated in the trading process.) I then review empirical results from the dispersed information approach and relate them to two key puzzles, the determination puzzle and the excess volatility puzzle. The dispersed information approach has made progress on both.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (2002)
Issue (Month): ()
Pages: 51-69

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Handle: RePEc:fip:fedfer:y:2002:p:51-69

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Keywords: Foreign exchange rates ; Information theory;

References

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report, Federal Reserve Bank of Minneapolis 227, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Liew, Venus Khim-Sen & Baharumshah, Ahmad Zubaidi & Habibullah, Muzafar Shah & Midi, Habshah, 2008. "Monetary exchange rate model: supportive evidence from nonlinear testing procedures," MPRA Paper 7293, University Library of Munich, Germany.
  2. Wagner, Christian, 2009. "Risk-Premia, Carry-Trade Dynamics, and Economic Value of Currency Speculation," MPRA Paper 21125, University Library of Munich, Germany.

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