An Impossibility Theorem for the Stationarity of Exchange Rates
49 Pages Posted: 9 Aug 2023 Last revised: 15 Jan 2025
Date Written: August 8, 2022
Abstract
Can the exchange rate be stationary in levels? We answer this question in the negative by proving an impossibility theorem, built upon the absence of arbitrage in international economies. We establish the sufficient conditions for the exchange rate to not be a stationary process in levels, and we do so without making distributional or preference assumptions. The essence of the paper is to study the properties of an exchange rate whose dynamics are restricted by the domestic and foreign stochastic discount factors, and by (no-arbitrage) trade in domestic and foreign short-term (one-period) bonds and long-term (infinite-maturity) bonds.
Keywords: Exchange rates, impossibility theorem, stationarity
JEL Classification: G12, G13,
Suggested Citation: Suggested Citation
Bakshi, Gurdip and Crosby, John, An Impossibility Theorem for the Stationarity of Exchange Rates (August 8, 2022). Available at SSRN: https://ssrn.com/abstract=4534982 or http://dx.doi.org/10.2139/ssrn.4534982
Do you have a job opening that you would like to promote on SSRN?
Feedback
Feedback to SSRN