Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment

Philippe Bacchetta and Eric van Wincoop
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Eric van Wincoop: University of Virginia

No 675, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This objective of this paper is to show that the proposal by Froot and Thaler (2000) 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 the moments related to these puzzles.

Date: 2018
New Economics Papers: this item is included in nep-dge, nep-mon and nep-opm
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Puzzling exchange rate dynamics and delayed portfolio adjustment (2021)
Working Paper: Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment (2019)
Working Paper: Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment (2019)
Working Paper: Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:675

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