684 - What do we Understand about Exchange Rates

Wetenschappelijke publicatie
Date 1 April 2002

One of the major puzzles of the economic profession is the pricing of exchange rates. Despite the development of numerous theories, the actual behaviour of exchange rates, especially in the short run, is not well understood. This article evaluates several popular exchange rate theories and presents new results of a model developed at de Nederlandsche Bank. This model gives a prominent role to growth differentials. An application to the eurodollar shows these can explain the depreciation of the euro only partly. Sentiment seems to be important as well. Key words: purchasing power parity, uncovered interest parity, monetary models, equilibrium exchange rates JEL codes: F31, G15