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What Drives Movements in Exchange Rates?

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Understanding what causes the exchange rate to move has been on ongoing challenge for economists. Despite extensive research, traditional macro models of exchange rate determination--with the exception of the Bank of Canada's exchange rate equation--have typically not fared well, motivating economists to explore new ways to model exchange rate movements that incorporate more complex and realistic settings. Within the context of the sharp appreciation of the Canadian dollar in 2003 and 2004, Bailliu and King review the macroeconomic models of exchange rates, as well as the micro-structure studies that highlight the importance of trading mechanisms, information asymmetry, and investor heterogeneity for explaining short-term dynamics in exchange rates. In addition to summarizing the current state of knowledge, they highlight recent advances and identify promising alternative approaches.

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  • Jeannine Bailliu & Michael R. King, 2005. "What Drives Movements in Exchange Rates?," Bank of Canada Review, Bank of Canada, vol. 2005(Autumn), pages 27-39.
  • Handle: RePEc:bca:bcarev:v:2005:y:2005:i:autumn05:p:27-39
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    Cited by:

    1. International Monetary Fund, 2013. "Canada; Selected Issues," IMF Staff Country Reports 13/41, International Monetary Fund.
    2. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Time-varying exchange rate exposure and exchange rate risk pricing in the Canadian Equity Market," Economic Modelling, Elsevier, vol. 37(C), pages 451-463.
    3. Corinne Winters, 2008. "The Carry Trade, Portfolio Diversification, and the Adjustment of the Japanese Yen," Discussion Papers 08-2, Bank of Canada.
    4. David Dupuis & Philippe Marcil, 2008. "The Effects of Recent Relative Price Movements on the Canadian Economy," Bank of Canada Review, Bank of Canada, vol. 2008(Autumn), pages 45-55.
    5. Radhakrishnan, Suresh & Tsang, Albert, 2011. "The valuation-relevance of the foreign translation adjustment: The effect of barriers to entry," The International Journal of Accounting, Elsevier, vol. 46(4), pages 431-458.

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