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Exchange Rate Disconnect Revisited

Author

Listed:
  • Ryan Chahrour
  • Vito Cormun
  • Pierre De Leo
  • Pablo A. Guerrón-Quintana
  • Rosen Valchev

Abstract

We find that variation in expected U.S. productivity explains over half of U.S. dollar/G7 exchange rate fluctuations. Both correctly-anticipated changes in productivity and expectational noise, which influences the expectation of productivity but not its eventual realization, have large effects. This “noisy news” is primarily related to medium-to-long-run TFP growth, and transmits to the exchange rate by causing significant deviations from uncovered interest parity. Together, these disturbances generate many well-known exchange puzzles, including predictable excess returns, low Backus-Smith correlations, and excess volatility. Our findings suggest these puzzles have a common origin, linked to productivity expectations.

Suggested Citation

  • Ryan Chahrour & Vito Cormun & Pierre De Leo & Pablo A. Guerrón-Quintana & Rosen Valchev, 2024. "Exchange Rate Disconnect Revisited," NBER Working Papers 32596, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32596
    Note: AP EFG IFM
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    Cited by:

    1. Vito Cormun & Kim Ristolainen, 2024. "Exchange Rate Narratives," Discussion Papers 167, Aboa Centre for Economics.
    2. Stein, Hillary, 2025. "Got milk? The effect of export price shocks on exchange rates," Journal of International Economics, Elsevier, vol. 155(C).
    3. Yang Yang & Ren Zhang, 2025. "Combining Proxies and Narrative Sign Restrictions: Revisiting the Effects of Technology Shocks," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 40(5), pages 554-568, August.
    4. Liyu Dou & Paul Ho & Thomas A. Lubik, 2023. "Max-Share Misidentification," Working Paper 25-02, Federal Reserve Bank of Richmond.

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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