NDLI: Exchange Rates Dynamics with Long-Run Risk and Recursive Preferences

Content Provider	Springer Nature Link
Author	Kollmann, Robert
Copyright Year	2015
Abstract	Standard macro models fail to explain why real exchange rates are volatile and disconnected from macro aggregates. Recent research argues that models with persistent growth rate shocks and recursive preferences can solve that puzzle. I show that this result is highly sensitive to the structure of financial markets. When just a bond is traded internationally, then long-run risk generates insufficient exchange rate volatility. A long-run risk model with recursive preferences may generate realistic exchange rate volatility, if all agents efficiently share their consumption risk by trading in complete financial markets; however, this entails massive international wealth transfers, and excessive swings in net foreign asset positions. By contrast, a long-run risk, recursive-preferences model in which only a fraction of households trades in complete markets, while the remaining households lead hand-to-mouth lives, can generate realistic exchange rate and external balance volatility.
Starting Page	175
Ending Page	196
Page Count	22
File Format	PDF
ISSN	09237992
Journal	Open Economies Review
Volume Number	26
Issue Number	2
e-ISSN	1573708X
Language	English
Publisher	Springer US
Publisher Date	2015-01-11
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Exchange rate Long-run risk Recursive preferences Complete financial markets Financial frictions International risk sharing International Economics Development Economics European Integration Macroeconomics/Monetary Economics Economic Policy Financial Economics
Content Type	Text
Resource Type	Article
Subject	Economics and Econometrics

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1	Ministry of Education (GoI), Department of Higher Education	Sanctioning Authority	https://www.education.gov.in/ict-initiatives
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3	National Digital Library of India Office, Indian Institute of Technology Kharagpur	The administrative and infrastructural headquarters of the project	Dr. B. Sutradhar bsutra@ndl.gov.in
4	Project PI / Joint PI	Principal Investigator and Joint Principal Investigators of the project	Dr. B. Sutradhar bsutra@ndl.gov.in Prof. Saswat Chakrabarti will be added soon
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