In this paper we develop a general equilibrium model of exchange rates where expectations of future variables directly affect the current exchange rate through an 'asset-market' term. This term, which results from the assumptions of incomplete asset markets and segmented product markets, does not appear in most models of exchange rates and it allows for changes in expectations about variables at t+1 to affect the date-t exchange rates without requiring changes in other contemporaneous variables. Therefore, the model has the potential to deliver changes in exchange rates, resulting from rational speculation, without much change in consumption allocations or goods' prices, making it consistent with the common view that exchange rates behave like asset prices. To implement the idea that exchange rates respond to expectations about future economic conditions, we introduce a regime variable governing the covariance structure of shocks to productivity and money growth in each country. Changes in the information variable are intended to generate changes in home and foreign agents' perceptions of the relative risks of holding the nominal asset. The model is roughly consistent with the common view that exchange rates behave like asset prices. However, it does not generate a sufficient degree of rational speculation to explain either observed variation of risk premia in foreign exchange markets or observed variation in exchange rates.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
8362.
Length: Date of creation: Jul 2001 Date of revision: Handle: RePEc:nbr:nberwo:8362
Note: IFM Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A. Phone: 617-868-3900 Email: Web page: http://www.nber.org More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: ().
Find related papers by JEL classification: F3 - International Economics - - International Finance F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
This paper has been announced in the following NEP Reports:
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.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.