Using a nonlinear structural Vector Autoregression model based on the general no-arbitrage condition, we examine the empirical relation between macroeconomic shocks and the foreign exchange risk premiums. We find that when the predictable excess returns from currency speculation are interpreted as time-varying risk premiums, more than 80% of its volatility can be accounted for by the same funda...

This paper re-examines Dornbusch’s (1976) sticky-price monetary model to exchange rate determination by employing both conventional Johansen’s (1988, 1990, 1994) maximum likelihood cointegration test and the ARDL Bound test by Pesaran, Shin, and Smith (2001) for the monthly data of Taiwan over the period 1986:01∼2003:04. Ambiguous results are found for the long-run equilibrium relationship betw...

This paper studies a quantitative dynamic-optimizing business cycle model of a small open economy with staggered price and wage setting. The model exhibits exchange rate overshooting in response to money supply shocks. The predicted variability of the nominal and, especially, of the real exchange rate is noticeably higher than in standard Real Business Cycle models with flexible prices and wage...