Exchange Rate Disconnect in General Equilibrium

By Oleg Itskhoki, D. Mukhin. Journal of Political Economy, 2017

282 citations recorded by the source corpus.

We propose a dynamic general equilibrium model of exchange rate determination that accounts for all major exchange rate puzzles, including Meese-Rogoff, Backus-Smith, purchasing power parity, and uncovered interest rate parity puzzles. We build on a standard international real business cycle model with home bias in consumption, augmented with shocks in the financial market that result in a volatile near-martingale behavior of exchange rates and ensure their empirically relevant comovement with macroeconomic variables, both nominal and real. Combining financial shocks with conventional productivity and monetary shocks allows the model to reproduce the exchange rate disconnect properties without compromising the fit of the business cycle moments.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/fb5bbad1942a6cde54db9ce9d33fb37ce070f95b

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In Economics and Econometrics

1. Jozef Konings
2. M. Amiti
3. Oleg Itskhoki
4. Miaojie Yu
5. Jan De Loecker
6. Qing Liu
7. Swati Dhingra
8. Gita Gopinath

Citations in the corpus

• Global trends in interest rates (2018, unknown): “Jiang et al. (2018) discuss the role of international investor preferences for the safety and liquidity of bonds issued by different countries as drivers of potential violations of covered interest rate parity.”
• International Shocks, Variable Markups, and Domestic Prices (2019, methodology): “This model nests both Kimball (1995) and Atkeson and Burstein (2008).”