Exchange rate puzzles : a review of the recent theoretical and empirical developments

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Authors

Mokoena, Thabo Mishack
Gupta, Rangan
Van Eyden, Renee

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Volume Title

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ICFAI Press

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.

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Keywords

Dynamic general equilibrium models, Exchange rate puzzles, Non-linear and Bayesian econometric models

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Citation

Mokoena, TM, Gupta, R & Van Eyden, R 2010, ' Exchange rate puzzles : a review of the recent theoretical and empirical developments', ICFAI journal of Monetary Economics, vol. Vlll, no.1-2, pp. 77-112.