Template-Type: ReDIF-Paper 1.0
Author-Name: Maurice J. Roche
Author-X-Name-First: Maurice
Author-X-Name-Last: Roche
Author-Email: mroche@economics.ryerson.ca 
Author-Workplace-Name: Department of Economics, Ryerson University, Toronto, Canada
Author-Name: Michael J. Moore
Author-X-Name-First: Michael
Author-X-Name-Last: Moore
Author-Email: m.moore@qub.ac.uk
Author-Workplace-Name: School of Management and Economics, The Queen's University of Belfast, Belfast, Northern Ireland 
Title: Solving Exchange Rate Puzzles with neither Sticky Prices nor Trade Costs
Abstract: We present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved. The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Habit persistence is modeled using Campbell Cochrane preferences with deep? habits. By deep habits, we mean habits defined over goods rather than countries. The model is simulated using the artificial economy methodology. It offers a neo-classical explanation of the Meese-Rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting. Finally, the model naturally generates the negative slope in the standard forward market regression. 
Classification-JEL: F31; F41; G12 
Keywords: Exchange Rate Puzzles; Forward Foreign Exchange; Habit Persistence
Length: 47 pages
Creation-Date: 2009-10
Number: 001
File-URL: http://economics.ryerson.ca/workingpapers/wp001.pdf
File-Format: Application/pdf
Handle: RePEc:rye:wpaper:wp001