How Can Asset Prices Value Exchange Rate Wedges? / Karen K. Lewis, Edith Liu.

Format:

Book

Author/Creator:

Lewis, Karen K.

Contributor:

National Bureau of Economic Research.

Liu, Edith.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30422.

NBER working paper series no. w30422

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

When available financial securities allow investors to optimally diversify risk across countries, standard theory implies that exchange rates should reflect this behavior. However, exchange rates observed in the data deviate from these predictions. In this paper, we develop a framework to value the welfare costs of these exchange rate wedges, as disciplined by asset returns. This framework applies to a general class of asset pricing and exchange rate models. We further decompose the value of these wedges into components, showing that the ability of goods markets to respond to financial markets through exchange rate adjustment has significant implications for welfare.

Notes:

Print version record

September 2022.