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Exchange Rates, Natural Rates, and the Price of Risk

Author

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  • Rohan Kekre
  • Moritz Lenel

Abstract

We study the source of exchange rate fluctuations using a general equilibrium model accommodating shocks in goods and financial markets. These shocks differ in their induced comovements between exchange rates, interest rates, and quantities. A calibration matching data from the U.S. and G10 currency countries implies that persistent shocks to relative demand, reflected in persistent interest rate differentials, account for 75% of the variance in the dollar/G10 exchange rate. Shocks to currency intermediation are important, however, in generating deviations from uncovered interest parity at high frequencies and explaining the dollar appreciation in crises.

Suggested Citation

  • Rohan Kekre & Moritz Lenel, 2024. "Exchange Rates, Natural Rates, and the Price of Risk," NBER Working Papers 32976, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32976
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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