Nominal exchange rate determination and dynamics in an OLG framework

Bambi, Mauro; Eugeni, Sara

doi:10.1007/s00199-020-01271-3

Nominal exchange rate determination and dynamics in an OLG framework

Bambi, Mauro; Eugeni, Sara

Authors

Dr Mauro Bambi mauro.bambi@durham.ac.uk
Associate Professor

Dr Sara Eugeni sara.eugeni@durham.ac.uk
Associate Professor

Abstract

The empirical evidence on nominal exchange rate dynamics shows a long-run relationship of this variable with the fundamentals of the economy, although such relationship disappears at shorter horizons. This apparently contrasting behaviour of the nominal exchange rate can be explained in an overlapping generations model where the currencies are not perfect substitutes. In this framework, we show that the nominal exchange rate is pinned down by the fundamentals at the monetary steady state. We study the local dynamics and show that when the monetary steady state is locally indeterminate, then fluctuations of the nominal exchange rate around its long-run value can emerge. In particular, we prove the existence of stationary sunspot equilibria, where random fluctuations of the nominal exchange rate arise as a result of self-fulfilling beliefs.

Citation

Bambi, M., & Eugeni, S. (2021). Nominal exchange rate determination and dynamics in an OLG framework. Economic Theory, 72, 93-132. https://doi.org/10.1007/s00199-020-01271-3

Journal Article Type	Article
Acceptance Date	Apr 15, 2020
Online Publication Date	May 8, 2020
Publication Date	2021-08
Deposit Date	Apr 17, 2020
Publicly Available Date	May 13, 2020
Journal	Economic Theory
Print ISSN	0938-2259
Electronic ISSN	1432-0479
Publisher	Springer
Peer Reviewed	Peer Reviewed
Volume	72
Pages	93-132
DOI	https://doi.org/10.1007/s00199-020-01271-3
Public URL	https://durham-repository.worktribe.com/output/1273190

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