Working Paper: NBER ID: w4818
Authors: Geert Bekaert
Abstract: This paper investigates the statistical properties of high frequency nominal exchange rates and forward premiums in the context of a dynamic two-country general equilibrium model. Primary focus is on the persistence, variability, leptokurtosis and conditional heteroskedasticity of exchange rates and on the behavior of foreign exchange risk premiums. The model combines temporal dependencies in preferences with a transaction cost technology that generates a role for money. Agents in the economy make decisions on a weekly frequency and face shocks which display time-varying uncertainty. Simulations reveal that the model accounts for the statistical properties of exchange rate data much more accurately than previous structural models.
Keywords: Foreign Exchange; Risk and Return; General Equilibrium
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relative money supplies (E51) | exchange rate (F31) |
| outputs (Y10) | exchange rate (F31) |
| time-varying rewards to consumption (D15) | time-varying expected returns (G17) |
| inflation risk (E31) | time-varying expected returns (G17) |
| conditional variances of market fundamentals (C29) | expected returns (G17) |
| conditional variances of market fundamentals (C29) | asset price variances (G19) |