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Foreign exchange: macro puzzles, micro tools

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  • Richard K. Lyons
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    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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    File URL: http://www.frbsf.org/publications/economics/pbcpapers/2001/pb01-10.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 2001-10.

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    Date of creation: 2001
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    Handle: RePEc:fip:fedfpb:2001-10

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    Keywords: Foreign exchange rates;

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    Cited by:
    1. Christian, Mueller-Kademann, 2009. "Puzzle solver," MPRA Paper 19852, University Library of Munich, Germany.
    2. Müller, Christian, 2012. "A new interpretation of known facts: The case of two-way causality between trading and volatility," Economic Modelling, Elsevier, vol. 29(3), pages 664-670.

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