Viewpoint: Towards a Solution to the Puzzles in Exchange Rate Economics: Where Do We Stand?

36 Pages Posted: 7 Aug 2005

See all articles by Lucio Sarno

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Abstract

This paper provides a selective overview of puzzles in exchange rate economics. We begin with the forward bias puzzle: high interest rate currencies appreciate when one might guess that investors would demand higher interest rates on currencies expected to fall in value. We then analyse the purchasing power parity puzzle: the real exchange rate displays no (strong) reversion to a stable long-run equilibrium level. Finally, we cover the exchange rate disconnect puzzle: the lack of a link between the nominal exchange rate and economic fundamentals. For each puzzle, we critically review the literature and speculate on potential solutions.

JEL Classification: F31

Suggested Citation

Sarno, Lucio, Viewpoint: Towards a Solution to the Puzzles in Exchange Rate Economics: Where Do We Stand?. Canadian Journal of Economics, Vol. 38, No. 3, pp. 673-708, August 2005, Available at SSRN: https://ssrn.com/abstract=772984

Lucio Sarno (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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