Comment on: Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect

The Devereaux-Engel paper (2002) addresses two long-standing puzzles in international economics: 1. exchange rate volatility, and 2. its disconnect. Their paper's main argument is straightforward. If economists impose conditions on a model so that the exchange rate is (approximately) irrelevant...

Full description

Saved in:
Bibliographic Details
Published in:Journal of monetary economics 2002-07, Vol.49 (5), p.941-946
Main Authors: Duarte, Margarida, Stockman, Alan C
Format: Article
Language:English
Subjects:
Economic models
Economic theory
Economics
Exchange market
Exchange rates
Finance
Foreign exchange rates
International economics
Macroeconomics
Monetary economics
Studies
Volatility
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The Devereaux-Engel paper (2002) addresses two long-standing puzzles in international economics: 1. exchange rate volatility, and 2. its disconnect. Their paper's main argument is straightforward. If economists impose conditions on a model so that the exchange rate is (approximately) irrelevant to product markets - by eliminating substitution and wealth effects of exchange-rate changes - then noise or irrational speculation can generate any degree of exchange-rate volatility and disconnect puzzles. The predictions of the Devereaux-Engel model about the behavior of excess returns is not consistent with the data. With a constant risk premium, the model implies that Fama type regressions of exchange-rate changes on the forward premium should generate coefficients between zero and one, while they tend to be negative in the data. Noise traders may very well play a role in exchange rate volatility, but the question remains very open.
ISSN:0304-3932
1873-1295
DOI:10.1016/S0304-3932(02)00131-9