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Persistent, Nonfundamental Exchange Rate Fluctuations

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  • Irasema Alonso

    (University of Rochester)

Abstract

A trading-post model of money is used to show how exchange rates can be affected by extrinsic uncertainty. With no uncertainty in fundamentals, we demonstrate that there exist equilibria where exchange rates as well as consumption allocations follow a stationary random process. The uctuations are permanent, and they affect economic welfare. These findings also apply when the currency supplies grow at different rates. Then, the only stationary equilibria in which both monies are valued are those with uctuations: the real value of the currencies follow a stationary process, and the average return on the fast-growing currency is lower than that of the slow-growing currency. (Copyright: Elsevier)

Suggested Citation

  • Irasema Alonso, 2004. "Persistent, Nonfundamental Exchange Rate Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 687-706, July.
    • Handle: RePEc:red:issued:v:7:y:2004:i:3:p:687-706
    DOI: 10.1016/j.red.2003.12.003
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    References listed on IDEAS

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    Cited by:

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    2. Alexei Deviatov & Igor Dodonov, 2006. "Exchange-rate volatility, exchange-rate disconnect, and the failure of volatility conservation," Working Papers w0079, Center for Economic and Financial Research (CEFIR).

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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