Katarina Juselius (University of Copenhagen) - Real exchange rate persistence and the excess return puzzle: the case of Switzerland versus the US

This week we welcomed Katarina Juselius from the University of Copenhagen.  
 
Title: Real exchange rate persistence and the excess return puzzle: the case of Switzerland versus the US

Abstract: Nominal exchange rates tend to undergo wide swings around their long-run equilibrium values, which is often referred to as the PPP puzzle. Closely related is the excess return puzzle, describing the fact that the differential between domestic and foreign interest rates deviates persistently from the expected change in the nominal exchange rate. These puzzles can be reconciled by allowing the expectations formation to be based on imperfect knowledge rather than on so-called rational expectations. Using the I(2) cointegrated VAR model, much of the excess return puzzle disappears when accounting for an uncertainty premium in the foreign exchange market that is proxied by the persistent PPP gap. Our results suggest that self-reinforcing feedback mechanisms are the major cause for the pronounced persistence in the Swiss-US parity conditions. View a PDF of the paper here.

Figure 1: Paul Mizen introduces Katarina's seminar
Figure 2: Paul Mizen, Søren Johansen, Katarina Juselius and Kevin Lee
Figure 3: Waiting for the seminar to start
Figure 4: Katarina delivering her seminar