Abstract:
This paper presents a comprehensive literature review of the theoretical and empirical
developments that have taken place over the last two decades in an attempt to address the
exchange rate puzzles. Specifically, we discuss non-linear and Bayesian econometric techniques,
Dynamic General Equilibrium models, and the Market Microstructure approach that has been
designed to address three exchange rate puzzles, namely, the Purchasing Power Parity (PPP)
puzzle, the exchange rate disconnect puzzle and the exchange rate determination puzzle. We
conclude that the exchange rate puzzles are likely to be less puzzling, if researchers decide to
move to non-linear econometric frameworks and microfounded general equilibrium models.