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 (Unpublished)

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Abstract

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
URI:	http://www.may.ie/academic/economics/ http://ideas.repec.org/s/may/mayecw.html
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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