This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. June 2006
  5. Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?

Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?

Download Full Text PDF

Abstract

Empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables. We introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence, the model implies that (a) observed fundamentals account for little of exchange rate volatility in the short to medium run, (b) over long horizons, the exchange rate is closely related to observed fundamentals, (c) exchange rate changes are a weak predictor of future fundamentals, and (d) the exchange rate is closely related to order flow. (JEL F3, F4, G0, G1, E0)

Citation

Bacchetta, Philippe, and Eric Van Wincoop. 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?" American Economic Review, 96 (3): 552-576. DOI: 10.1257/aer.96.3.552

JEL Classification

  • F31 Foreign Exchange
  • G15 International Financial Markets