Exchange-Rate Dark Matter

March 1, 2012

Preview Citation

Format: Chicago

Martin D Evans. Exchange-Rate Dark Matter, (USA: International Monetary Fund, 2012) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Dark matter accounts for 83 percent of the matter in the universe and plays a central role in cosmology modeling. This paper argues that an analogous form of dark matter plays a similarly important role in international macroeconomics. Exchange-rate dark matter is invisible, but its existence can be inferred from observations on real exchange rates and interest rates. I first show that dark matter is the dominant driver of short- and medium-term changes in real exchange rates for the G-7 countries; accounting for more than 90 percent of the variance at the five-year horizon. I then develop a model in which risk shocks account for dark matter's role as a driver of exchange-rate dynamics and other macro variables.

Subject: Consumption, Depreciation, Financial services, Foreign exchange, National accounts, Real exchange rates, Real interest rates, Return on investment

Keywords: Consumption, Depreciation, E.U. household, Europe, Exchange Rate Dynamics, Exchange-rate dark matter, Growth differential, Habits, Incomplete Markets, Interest differential, Marginal utility, Open economy, Open-Economy Macro Models, Real exchange rates, Real interest rate, Real interest rates, Return on investment, Risk premium, Risk shock, Terms of trade, WP

Publication Details

Pages:

63
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/066
Stock No:

WPIEA2012066
ISBN:

9781463938437
ISSN:

1018-5941

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