Recent research has revealed a wealth of information about the microeconomics of currency markets and thus the determination of exchange rates at short horizons. This information is valuable to us as scientists since, like evidence of macroeconomic regularities, it can provide critical guidance for designing exchange-rate models. This paper presents an optimizing model of short-run exchange-rat...

This paper developes a small open economy model in which domestic resource shocks play a vital role in driving the dynamics of the major macroeconomic aggregates. Households rent capital and labour to rms and have access to an international bond market. The model is calibrated to recent Icelandic data and simulated under two alternative exchange rate regimes: oating rates, and monetary union me...

Given that a multinational enterprise can react flexibly upon exchange rate movements, international trade flows may be interpreted as an option. An enterprise will opt to export if the profits obtained from exporting under given exchange rate developments are greater than if foreign subsidiary sales were opted. Naturally, given negative exchange rate scenario situations, an enterprise will cho...

We assess the behavior of real effective exchange rates (REERs) of members of the CEMAC zone with respect to their long-term equilibrium paths. A reduced form of the fundamental equilibrium exchange rate (FEER) model is estimated and associated misalignments are derived for the period 1980 to 2009. Our findings suggest that for majority of countries, macroeconomic fundamentals have the expected...

Standard tests of the Harrod-Balassa-Samuelson (HBS) hypothesis treat productivity levels in and across countries as fixed and observable, and offer little empirical support for the hypothesis. If productivity follows a jump-diffusion process, these standard tests will generate biased estimates, measuring productivity levels with error. This paper instead proposes an ‘errors in variables’ appro...

We use a model of proportionate growth to describe the dynamics of international trade flows. We provide an explanation to the fact that the extensive margin of trade account for a large fraction of the greater exports of large economies, as well as for a number of stylized facts described by the literature on trade networks such as the power-law distribution of connectivity and the fat tails d...

This paper examines how unhedged currency exposure of firms varies with changes in currency flexibility. A sequence of four time-periods with alternating high and low currency volatility in India provides a natural experiment in which changes in currency exposure of a panel of firms is measured, and the moral hazard versus incomplete markets hypotheses tested. We find that firms carried higher ...

Numerous economic historians have suggested that institutions which supported contract enforcement were necessary for impersonal exchange to emerge in medieval Europe. Yet this literature cannot account for the bill of exchange, an important financial instrument that was legally enforced in both the medieval Islamic and Christian worlds but remained relegated to personal networks in only the fo...

What explains the central role of dollar in world trade? Will US currency retain its dominant status future? This paper develops a quantitative general equilibrium framework with endogenous choice that can address these questions. Complementarities price setting and input-output linkages across firms generate complementarities making exporters coordinate on same invoicing. The is more likely to...

A practice that has become widespread is that of comparing forecasts of financial return variability obtained from discrete time models against high frequency estimates based on continuous time theory. In explanatory financial return variability modelling this raises several methodological and practical issues, which suggests an alternative framework is needed. The contribution of this study is...