NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Urho Lempinen

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E-Mail: urho.lempinen@cdgroup.fi

NBER Working Papers and Publications

December 2013Exchange rate dynamics revisited
with Jorge Braga de Macedo: w19718
Many monetary and fiscal policy decision makers and economists hold the view that exchange rates are volatile even though nominal exchange rates vary less than many other financial market prices and yields. This paper seeks an explanation for this puzzle by contrasting exchange rate dynamics in a general equilibrium model to those presented in Dornbusch (1976) and Kouri (1978). Kouri introduced the "acceleration hypothesis'', according to which the rate of currency depreciation is given by the ratio of the current account deficit to the sum of holdings of foreign assets by domestic agents and holdings of domestic assets by foreign agents. In this paper, we derive the "generalized acceleration hypothesis'', assuming price flexibility but imperfect substitutability of assets. A Kouri type gr...
 
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