Uncertainty in foreign exchange market: Nonfundamentals and PPP.

摘要

It is now known that the uncertainty plays a critical role over the economy. It has been shown that the nonfundamental uncertainty called sunspot matters.; Noting the fact that the capital movement across the countries and the speculative demand for foreign currencies are rapidly increasing, this paper deals with a sunspot equilibrium in the foreign exchange market, and get the established result that the exchange rate can deviate from Purchasing Power Parity (PPP) even in the long run.; The first chapter develops the sunspot equilibrium exchange rate model from the usual 2-country model. The empirical result shows that the sunspot equilibrium exchange rate deviating from PPP and Interest Rate Parity (IRP) is consistent with the real data. More importantly, the Generalized Method of Moments (GMM) overidentification test is shown to support that more general Euler equations are in favor of our sunspot equilibrium exchange rate model.; The remaining two chapters try to explain theoretically how the sunspot equilibrium exchange rate can deviate from PPP despite no trading friction. The sunspot exchange rate is shown to be an equilibrium, where the risk avers agents do not want to trade under a uncertain exchange rate even if it deviates from PPP. Comparing two country models without and with foreign currency market reveals that the possibility of sunspot equilibrium exchange rate decreases substantially when the foreign exchange market is introduced. This theoretical work helps us to understand the structure and path of the sunspot equilibrium exchange rate.