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Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment / Philippe Bacchetta, Eric van Wincoop.
- Format:
- Book
- Author/Creator:
- Bacchetta, Philippe.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w26259.
- NBER working paper series no. w26259
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2019.
- Summary:
- The objective of this paper is to show that the proposal by Froot and Thaler (1990) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all targeted moments related to these puzzles.
- Notes:
- Print version record
- September 2019.
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