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Learning, Forward Premium Puzzle and Exchange Rate Fundamentals under Sticky Prices

Author

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  • Avik Chakraborty

    (University of Tennessee, Knoxville)

Abstract

Chakraborty (2007) provides a model of adaptive learning applied to a simple monetary model of exchange rate under flexible prices to generate results similar to forward premium puzzle. This paper redifines the model and empirically examines key model assumptions of structural break in the relationship between exchange rates and fundamentals and the non-stationarity of fundamentals under the alternative assumption of sticky prices. The results show that although there is stronger evidence of structural break, the fundamentals follow stationary processes.

Suggested Citation

  • Avik Chakraborty, 2007. "Learning, Forward Premium Puzzle and Exchange Rate Fundamentals under Sticky Prices," Economics Bulletin, AccessEcon, vol. 6(34), pages 1-13.
    • Handle: RePEc:ebl:ecbull:eb-07f30009
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    File URL: http://www.accessecon.com/pubs/EB/2007/Volume6/EB-07F30009A.pdf
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    Cited by:

    1. Hall Stephen G. & Kenjegaliev Amangeldi & Swamy P. A. V. B. & Tavlas George S., 2013. "The forward rate premium puzzle: a case of misspecification?1)," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(3), pages 265-279, May.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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