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Exchange-Rate Dark Matter

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  • Martin D Evans

Abstract

Dark matter accounts for 83 percent of the matter in the universe and plays a central role in cosmology modeling. This paper argues that an analogous form of dark matter plays a similarly important role in international macroeconomics. Exchange-rate dark matter is invisible, but its existence can be inferred from observations on real exchange rates and interest rates. I first show that dark matter is the dominant driver of short- and medium-term changes in real exchange rates for the G-7 countries; accounting for more than 90 percent of the variance at the five-year horizon. I then develop a model in which risk shocks account for dark matter's role as a driver of exchange-rate dynamics and other macro variables.

Suggested Citation

  • Martin D Evans, 2012. "Exchange-Rate Dark Matter," IMF Working Papers 12/66, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/66
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    References listed on IDEAS

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    1. An economist's foray into econophysics
      by Economic Logician in Economic Logic on 2012-04-02 19:25:00

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    Cited by:

    1. Martin D. D. Evans & Dagfinn Rime, 2017. "Order Flow Information and Spot Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 17, pages 725-776 World Scientific Publishing Co. Pte. Ltd..
    2. Berg, Kimberly A. & Mark, Nelson C., 2015. "Third-country effects on the exchange rate," Journal of International Economics, Elsevier, vol. 96(2), pages 227-243.

    More about this item

    Keywords

    International finance; Exchange Rate Dynamics; Open-Economy Macro Models; Habits; Incomplete Markets; risk; consumption; exchange-rate; exchange rates; depreciation; Macroeconomic Aspects Of International Trade And Finance; General Financial Markets;

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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