Exchange Rates and Interest Parity
This paper surveys recent theoretical and empirical contributions on foreign exchange rate determination. The paper first considers monetary models under uncovered interest parity and rational expectations. Then the paper considers deviations from UIP/rational expectations: foreign exchange risk premium, private information, near-rational expectations, and peso problems.
This essay is to appear as a chapter in the Handbook of International Economics, vol. 4 (Elsevier), edited by Gita Gopinath, Elhanan Helpman, and Kenneth Rogoff. I thank Philippe Bacchetta and Fabio Ghironi, as well as Gita Gopinath and Ken Rogoff for helpful comments. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.