Solving exchange rate puzzles with neither sticky prices nor trade costs

Journal of International Money and Finance

Volumn 29, Issue 6, 2010, Pages 1151-1170

  Moore, Michael J ^a   Roche, Maurice J ^b  

^a QUEEN'S UNIVERSITY BELFAST   (United Kingdom)

^b RYERSON UNIVERSITY   (Canada)

Author keywords

Exchange rate puzzles; Forward foreign exchange; Habit persistence

Indexed keywords

EID: 77955582311     PISSN: 02615606     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.jimonfin.2010.02.008     Document Type: Article

References (60)

1. Abel A. Asset prices under habit formation and catching up with the Joneses. American Economic Review, Papers and Proceedings 1990, 80(2):38-42.
2. Ait-Sahalia Y., Parker J., Motohiro Y. Luxury goods and the equity premium. Journal of Finance 2004, 59(6):2959-3008.
3. Alexius A. Uncovered interest parity revisited. Review of International Economics 2001, 9(3):505-517.
4. Alvarez F., Atkeson A., Kehoe P. Time-varying Risk, Interest Rates, and Exchange Rates in General Equilibrium 2006, Staff Report: 371, available at, Federal Reserve Bank of Minneapolis. http://www.minneapolisfed.org/research/SR/SR371.pdf.
5. Anderson J., Van Wincoop E. Trade costs. Journal of Economic Literature 2004, 42(3):691-751.
6. Bacchetta P., Van Wincoop E. Rational Inattention: A Solution to the Forward Discount Puzzle 2005, Mimeo.
7. Backus D., Kehoe P., Kydland F. International business cycles. Journal of Political Economy 1992, 100(4):745-775.
8. Backus D., Gregory A., Telmer C. Accounting for forward rates in markets for foreign currency. Journal of Finance 1993, 58(5):1887-1908.
9. Backus D., Foresi S., Telmer C. Affine term structure models and the forward premium anomaly. Journal of Finance 2001, 56(1):279-304.
10. Backus D. Interpreting comovements in the trade balance and the terms of trade. Journal of International Economics 1993, 24(3-4):375-387.
11. Backus D., Kehoe P., Kydland F. Dynamics of the trade balance and the terms of trade: the j-curve?. American Economic Review 1994, 84(1):84-103.
12. Bansal R., Dahlquist M. The forward premium puzzle: different tales from developed and emerging economies. Journal of International Economics 2000, 51(1):115-144.
13. Bekaert G. The time-variation of risk and return in foreign exchange markets: a general equilibrium perspective. Review of Financial Studies 1996, 9(2):427-440.
14. Boudoukh J., Richardson M., Whitelaw R. The Information in Long-Maturity Forward Rates: Implications for Exchange Rates and the Forward Premium Anomaly 2005, NBER, Working Paper 11840.
15. Brandt M., Cochrane J., Santa-Clara P. International risk sharing is better than you think, or exchange rates are much too smooth. Journal of Monetary Economics 2006, 53(4):671-698.
16. Campbell J., Cochrane J. By force of habit: a consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 1999, 107(1):205-251.
17. Carlson J., Osler C. Short-run Exchange-rate Dynamics: Theory and Evidence 2005, Mimeo.
18. Chari V., Kehoe P., McGrattan E. Can sticky price models generate volatile and persistent real exchange rates?. Review of Economic Studies 2002, 69(3):533-563.
19. Chetty R., Szeidl A. Consumption commitments: a foundation for reference-dependent preferences and habit formation 2009, mimeo. http://www.econ.berkeley.edu/%7Eszeidl/papers/commit_habit.pdf.
20. Chinn M., Meredith G. Monetary policy and long-horizon uncovered interest parity. IMF Staff Papers 2004, 51(3):409-430.
21. Chinn M. The (partial) rehabilitation of interest rate parity in the floating rate era: longer horizons, alternative expectations, and emerging markets. Journal of International Money and Finance 2006, 25(1):7-21.
22. Christiano L. Modelling the liquidity effect of a money shock. Federal Reserve Bank of Minneapolis Quarterly Review 1991, 3-34.
23. Constantinides G. Habit formation: a resolution of the equity premium puzzle. Journal of Political Economy 1990, 98(3):519-543.
24. Crossley T., Low H. Is the elasticity of intertemporal substitution constant? 2008, mimeo, Available at. http://www.econ.cam.ac.uk/faculty/crossley/research/constanteis_r1.pdf.
25. Duesenberry J. Income, Saving and the Theory of Consumer Behavior 1949, Harvard University Press, Cambridge, MA.
26. Elliot, Graham " The robustness of cointegration methods when regressors almost have unit roots" Econometrica 1998, 66:149-158.
27. Engel C. On the foreign exchange risk premium in a general equilibrium model. Journal of International Economics 1992, 32(3-4):305-319.
28. Engel C. The forward discount anomaly and the risk premium: a survey of recent evidence. Journal of Empirical Finance 1996, 3(2):123-191.
29. Engel C. On the foreign exchange risk premium in sticky-price general equilibrium models. International Tax and Public Finance 1999, 6(4):491-505.
30. Engel C. Comments on Obstfeld and Rogoff's 'The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?. NBER Macroeconomics Annual 15 2001, MIT Press, Cambridge, MA.
31. Evans M., Lyons R. Order flow and exchange rate dynamics. Journal of Political Economy 2002, 110(1):170-180.
32. Evans M., Lyons R. A New Micro Model of Exchange Rate Dynamics 2005, Mimeo.
33. Feenstra R. Functional equivalence between liquidity costs and the utility of money. Journal of Monetary Economics 1986, 17(2):271-291.
34. Faust J., Rogers J., Wright J. Exchange rate forecasting: the errors we've really made. Journal of International Economics 2003, 60(1):35-59.
35. Fisher E. The forward premium in a model with heterogeneous prior beliefs. Journal of International Money and Finance 2006, 25(1):48-70.
36. Flood R., Rose A. Understanding exchange rate volatility without the contrivance of macroeconomics. Economic Journal 1999, 109(459):660-672.
37. Frankel J., Poonawala J. The forward market in emerging currencies: less biased than in major currencies. Journal of International Money and Finance 2010, 29(3):585-598.
38. Gourinchas P., Tornell A. Exchange rate puzzles and distorted beliefs. Journal of International Economics 2004, 64(2):303-333.
39. Gourinchas P., Parker J. Consumption over the life cycle. Econometrica 2002, 70(1):47-89.
40. Hau H. Competitive entry and endogenous risk in the foreign exchange market. Review of Financial Studies 1998, 11(4):757-788.
41. Hodrick R. The Empirical Evidence on the Efficiency of Forward and Futures Foreign Exchange Markets 1987, Harwood Academic Publishers, Switzerland.
42. Jeanne O., Rose A. Noise trading and exchange rate regimes. Quarterly Journal of Economics 2002, 117(2):537-569.
43. Killeen W., Lyons R., Moore M. Fixed versus flexible: lessons from EMS order flow. Journal of International Money and Finance 2006, 25(4):551-579.
44. Ljungqvist L., Uhlig H. Tax policy and aggregate demand management under catching up with the Joneses. American Economic Review 2000, 90(3):356-366.
45. Lucas R. Interest rates and currency prices in a two-country world. Journal of Monetary Economics 1982, 10(3):335-359.
46. Mark N. Exchange rates and fluctuations: evidence on long-horizon predictability. American Economic Review 1995, 85(1):201-218.
47. Meese R., Rogoff K. Empirical exchange rate models of the seventies, do they fit out of sample?. Journal of International Economics 1983, 14(1-2):3-24.
48. Moore M. Covered purchasing power parity, ex-ante PPP and risk aversion. Journal of Business Finance and Accounting 1997, 24(2):397-412.
49. Moore M., Roche M. Less of a puzzle: a new look at the forward forex market. Journal of International Economics 2002, 58(2):387-411.
50. Moore M., Roche M. A neo-classical explanation of nominal exchange rate volatility. Exchange Rate Economics: Where Do We Stand? 2005, MIT Press, Cambridge, MA. P. de Grauwe (Ed.).
51. Moore M., Roche M. Volatile and persistent real exchange rates with or without sticky prices. Journal of Monetary Economics 2008, 55(2):423-433.
52. Obstfeld M., Rogoff K. New directions for stochastic open economy models. Journal of International Economics 2000, 50(1):117-153.
53. Obstfeld M., Rogoff K. The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?. NBER Macroeconomics Annual 15 2001, MIT Press, Cambridge, MA.
54. Oswald A., Clarke A. Satisfaction and comparison income. Journal of Public Economics 1996, 61(3):359-381.
55. Oswald A. Happiness and economics. Economic Journal 1997, 107(445):1815-1831.
56. Ravn M., Schmitt-Grohe S., Uribe M. Deep habits. Review of Economic Studies 2006, 73(1):195-218.
57. Ravn M., Schmitt-Grohe S., Uribe M. Pricing of habits and the law of one price. American Economic Review 2007, 97(2):232-238.
58. Sarno L. Towards a solution to the puzzles in exchange rate economics: where do we stand?. Canadian Journal of Economics 2005, 38(3):673-708.
59. Taylor M. The economics of exchange rates. Journal of Economic Literature 1995, 33(1):13-47.
60. Verdelhan A. A habit-based explanation of the exchange rate risk premium. Journal of Finance 2010, 65(1):123-145.