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Nominal exchange rate determination and dynamics in an OLG framework.

Bambi, Mauro and Eugeni, Sara (2021) 'Nominal exchange rate determination and dynamics in an OLG framework.', Economic theory., 72 . pp. 93-132.

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.

Item Type:Article
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Status:Peer-reviewed
Publisher Web site:https://doi.org/10.1007/s00199-020-01271-3
Publisher statement:his article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.
Date accepted:15 April 2020
Date deposited:17 April 2020
Date of first online publication:08 May 2020
Date first made open access:13 May 2020

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