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Short-run Exchange-Rate Dynamics: Theory and Evidence

Listed author(s):
  • John A Carlson
  • Christian M. Dahl
  • Carol L. Osler

    ()

    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

Recent research has revealed a wealth of information about the microeconomics of currency markets and thus the determination of exchange rates at short horizons. This information is valuable to us as scientists since, like evidence of macroeconomic regularities, it can provide critical guidance for designing exchange-rate models. This paper presents an optimizing model of short-run exchange-rate dynamics consistent with both the micro evidence and the macro evidence, the first such model of which we are aware. With respect to microeconomics, the model is consistent with the institutional structure of currency markets, it accurately reflects the constraints and objectives faced by the major participants, and it fits key stylized facts concerning returns and order flow. With respect to macroeconomics, the model is consistent with most of the major puzzles that have emerged under floating rates.

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File URL: ftp://ftp.econ.au.dk/creates/rp/08/rp08_01.pdf
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Paper provided by Department of Economics and Business Economics, Aarhus University in its series CREATES Research Papers with number 2008-01.

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Length: 56
Date of creation: 07 Jan 2008
Handle: RePEc:aah:create:2008-01
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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