Exchange rates, macroeconomic fundamentals and risk aversion
Exchange rates, macroeconomic fundamentals and risk aversion
This paper proposes a theoretical model for determining the exchange rate based on the interaction between international bond markets with different maturities. The model accommodates the presence of risk premia between short- and long-term bonds. The difference in risk premium between international bond markets produces imbalances between their yields and is responsible for the differences in equilibrium between the future spot exchange rate and the corresponding forward price. These departures from the expectations hypothesis of the international term structure of interest rates lead to unintended effects on the efficacy of monetary policy in open economies. The existence of imbalances in the risk premium between countries can be considered by monetary authorities as an alternative tool for conducting monetary policy and boosting real output.
363-370
Laborda, R.
2bdeacea-069f-48ee-a898-a3a9ca486142
Olmo, J.
706f68c8-f991-4959-8245-6657a591056e
13 June 2014
Laborda, R.
2bdeacea-069f-48ee-a898-a3a9ca486142
Olmo, J.
706f68c8-f991-4959-8245-6657a591056e
Laborda, R. and Olmo, J.
(2014)
Exchange rates, macroeconomic fundamentals and risk aversion.
Theoretical Economic Letters, 4 (6), .
(doi:10.4236/tel.2014.46047).
Abstract
This paper proposes a theoretical model for determining the exchange rate based on the interaction between international bond markets with different maturities. The model accommodates the presence of risk premia between short- and long-term bonds. The difference in risk premium between international bond markets produces imbalances between their yields and is responsible for the differences in equilibrium between the future spot exchange rate and the corresponding forward price. These departures from the expectations hypothesis of the international term structure of interest rates lead to unintended effects on the efficacy of monetary policy in open economies. The existence of imbalances in the risk premium between countries can be considered by monetary authorities as an alternative tool for conducting monetary policy and boosting real output.
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Published date: 13 June 2014
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Economics
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Local EPrints ID: 369375
URI: http://eprints.soton.ac.uk/id/eprint/369375
PURE UUID: 28cf6ea0-b22e-4f91-a777-4de48258f925
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Date deposited: 02 Oct 2014 11:11
Last modified: 15 Mar 2024 03:46
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R. Laborda
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