A Model of Foreign Exchange Rate Indetermination
Economic agents undertake actions to protect themselves from the short-run impact of foreign exchange rate fluctuations: Nominal goods prices are set in consumers' currencies, and firms hedge foreign exchange risk. A model is presented here which shows that these features of the economy can lead to indeterminacy in the nominal exchange rate in the short run. There can be noise in the exchange rate, unrelated to any fundamentals, essentially because the short-run fluctuations do not influence any rational agent's behavior. Empirical implications of this sort of noise are explored
What people are saying - Write a review
We haven't found any reviews in the usual places.
100 per cent Academic American firms Ariel Pakes assume back cover behavior budget constraint changing prices chartists consumers cost distributed diversify dollar of insurance domestic firm dynamic model Economic Fluctuations effect Empirical Implications equilibrium exchange rate changes exchange rate fluctuations exchange rate risk exchange risk exchange-rate expected utility face firm receives firm's profits firms hedge first-order condition Fluctuations and Growth foreign exchange market foreign exchange rate foreign firm full subscription gopher at nber.harvard.edu http://nber.harvard.edu inside the back instructions inside International Capital Internet list of NBER ln(s long run Macroeconomics Massachusetts Avenue menu-cost pricing model presented NBER Reporter NBER Working Papers nominal exchange rate nominal price stickiness normally distributed Number Author(s optimal owners p,qi Papers and Reprints partial subscriptions pricing to market produced pure noise random variable revenue risk aversion short-run single area Title Date uncertainty utility function variable volatility wages World Wide World Wide Web