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The exchange rate disconnect puzzle: a resolution?

Laganà, Gianluca and Sgro, Pasquale 2007, The exchange rate disconnect puzzle: a resolution?, Asia-Pacific journal of accounting & economics, vol. 14, no. 1, pp. 44-68.

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Title The exchange rate disconnect puzzle: a resolution?
Author(s) Laganà, Gianluca
Sgro, Pasquale
Journal name Asia-Pacific journal of accounting & economics
Volume number 14
Issue number 1
Start page 44
End page 68
Publisher City University of Hong Kong
Place of publication Hong Kong
Publication date 2007
ISSN 1608-1625
Keyword(s) exchange rate
economic fundamentals
macroeconomic and microeconomic models
nonlinear models
parameter instability
Summary Early empirical studies of exchange rate determinants demonstrated that fundamentals-based monetary models were unable to outperform the benchmark random walk model in out-of-sample forecasts while later papers found evidence in favor of long-run exchange rate predictability. More recent theoretical works have adopted a microeconomic structure; a utility-based new open economy macroeconomic framework and a rational expectations present value model. Some recent empirical work argues that if the models are adjusted for parameter instability, it is a good predictor of nominal exchange rates while others use aggregate idiosyncratic volatility to generate good predictions. This latest research supports the idea that fundamental economic variables are likely to influence exchange rates especially in the long run and further that the emphasis should change to the economic value or utility based value to assess these macroeconomic models.
Notes JEL Classification: E40, E52, C32
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Language eng
Field of Research 140210 International Economics and International Finance
Socio Economic Objective 970114 Expanding Knowledge in Economics
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2007, City University of Hong Kong
Persistent URL http://hdl.handle.net/10536/DRO/DU:30007032

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