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Exchange Rate Disconnect Revisited

Author

Listed:
  • Ryan Chahrour

    (Cornell University)

  • Vito Cormun

    (Santa Clara University)

  • Pierre De Leo

    (University of Maryland)

  • Pablo Guerron-Quintana

    (Boston College)

  • Rosen Valchev

    (Boston College)

Abstract

We find that variation in expected U.S. productivity explains over half of G6 exchange rate fluctuations vis-a-vis the USD. Both correctly-anticipated changes in productivity and expectational “noise,” which influences expectations of productivity but not the actual realization, have significant effects on exchange rates. Together, these two types of disturbances explain many unconditional exchange rate patterns, including predictable excess returns, low Backus-Smith correlations, and excess volatility. Our findings suggest these well-known puzzles have a common empirical origin, which is linked to (expected) productivity. We also discuss how noise in expectations has obscured the relationship between exchange rates and fundamentals in the empirical approaches undertaken in prior work.

Suggested Citation

  • Ryan Chahrour & Vito Cormun & Pierre De Leo & Pablo Guerron-Quintana & Rosen Valchev, 2021. "Exchange Rate Disconnect Revisited," Boston College Working Papers in Economics 1041, Boston College Department of Economics, revised 12 May 2023.
    • Handle: RePEc:boc:bocoec:1041
    Note: previously circulated as "Exchange Rate Disconnect Redux"
    as

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    More about this item

    Keywords

    Exchange Rate Disconnect; TFP News; Excess Returns; Excess Volatility;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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