CEMAP Seminar with Rosen Valchev (Boston College)

Exchange Rate Disconnect Revisited

by 

Rosen Valchev (Boston College), (joint with Ryan Chahrour, Cornell University; Vito Cormun, Santa Clara University; Pierre De Leo, University of Maryland)  

Abstract

We find that variation in expected U.S. productivity explains over half of G6 exchange
rate fluctuations vis-a-vis the USD. Both correctly-anticipated changes in productivity
and expectational “noise,” which influences expectations of productivity but not the
actual realization, have significant effects on exchange rates. Together, these two types
of disturbances generate many stylized exchange rate facts, including predictable
excess returns, low Backus-Smith correlations, and excess volatility. Thus, our findings
suggest these well-known puzzles have a common empirical origin, which is linked to
(expected) productivity. We argue this has been obscured from previous analysis due
to not accounting for noise in expectations.

About Dr Rosen Valchev

My research agenda spans several topics within macroeconomics, including both classic
“closed economy” issues (e.g. sources of nominal rigidities and real business cycles) and also many “open economy” questions (e.g. exchange rate and capital flows determination). While the majority of my work could be classed as macroeconomic theory and aims at providing novel economic models of a variety of puzzling phenomena, I am also deeply interested in disciplining and falsifying models with data. Hence, my research features a mix of theoretical work developing new economic mechanisms, and also their quantification and direct empirical testing against the data.

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