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    Solving Exchange Rates Puzzles with neither Sticky Prices nor Trade Costs

    Roche, Maurice J. and Moore, Michail (2007) Solving Exchange Rates Puzzles with neither Sticky Prices nor Trade Costs. UNSPECIFIED. (Unpublished)

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    We present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved. The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Habit persistence is modeled using Campbell Cochrane preferences with �deep� habits. By deep habits, we mean habits defined over goods rather than countries. The model is simulated using the artificial economy methodology. It offers a neo-classical explanation of the Meese-Rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting. Finally, the model naturally generates the negative slope in the standard forward market regression.

    Item Type: Other
    Additional Information: JEL classification: F31; F41; G12
    Keywords: Exchange Rate Puzzles; Forward Foreign Exchange; Habit Persistence
    Academic Unit: Faculty of Social Sciences > Economics, Finance and Accounting
    Item ID: 532
    Depositing User: Ms Sandra Doherty
    Date Deposited: 30 May 2007
    Refereed: No
    Use Licence: This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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