Exchange rate variability, market activity and heterogeneity

We study the role played by geographic and bank-size heterogeneity in the relation between exchange rate variability and market activity. We find some support for the hypothesis that increases in short-term global interbank market activity, which can be interpreted as due to variation in information arrival, increase variability. However, our results do not suggest that local short-term activity increases variability. With respect to long-term market activity, which can be interpreted as a measure of liquidity, we find that large and small banks have opposite effects. Specifically, our results suggest that the local group of large banks' liquidity increases variability, whereas the local group of small banks' liquidity reduces variability

How Important is Discount Rate Heterogeneity for Wealth Inequality?

This paper investigates the role of discount rate heterogeneity for wealth inequality. The key idea is to infer the distribution of preference parameters from the observed age profile of wealth inequality. The contribution of preference heterogeneity to wealth inequality can then be measured using a quantitative life-cycle model.I find that discount rate heterogeneity increases the Gini coefficient of wealth by 0.06 to 0.11. The share of wealth held by the richest 1% of households rises by 0.03 to 0.13. The larger changes occur when altruistic bequests are large and when preferences are strongly persistent across generations. Discount rate heterogeneity also helps account for the large wealth inequality observed among households with similar lifetime earnings.wealth inequality, preference heterogeneity

Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?

Empirical evidence shows that macroeconomic fundamentals have little explanatory power for nominal exchange rates. On the other hand, the recent microstructure approach to exchange rates' has shown that most exchange rate volatility at short to medium horizons is related to order flows. This suggests that investor heterogeneity might be key to understanding exchange rate dynamics, in contrast to the common representative agent approach in macroeconomic models of exchange rate determination. To explore this issue, we introduce investor heterogeneity into an otherwise standard monetary model of exchange rate determination. There are two types of heterogeneity: dispersed information about fundamentals and non-fundamentals based heterogeneity (e.g., liquidity traders). We show that information dispersion leads to magnification and endogenous persistence of the impact of non-fundamentals trade on the exchange rate rational confusion about the source of exchange rate fluctuations. Higher order expectations, familiar from Keynes' beauty contest', partly contribute to these results. The implications of the model are consistent with the evidence on the relationship between exchange rates and fundamentals: (i)fundamentals play little role in explaining exchange rate movements in the short to medium run, (ii) over longer horizons the exchange rate is primarily driven by fundamentals, (iii) exchange rate changes are a weak predictor of future fundamentals.

PPP Strikes Back: Aggregation and the Real Exchange Rate

We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that established time series and panel methods substantially exaggerate the persistence of real exchange rates because of heterogeneity in the dynamics of disaggregated relative prices. When heterogeneity is properly taken into account, estimates of the real exchange rate half-life fall dramatically, to little more than one year, or significantly below Rogoff’s ‘consensus view’ of three to five years. We show that corrected estimates are consistent with plausible nominal rigidities, thus, arguably, solving the PPP puzzle.Real Exchange Rate Persistence, Purchasing Power Parity, Aggregation, Parameter Heterogeneity.

US shocks and global exchange rate configurations

The paper analyses the heterogeneity in the link between macroeconomic fundamentals and exchange rates. For a set of important US-specific economic shocks, it shows that such shocks have exerted a remarkably heterogeneous effect on global exchange rate configurations over the past 25 years. Despite a significant decline over time, this heterogeneity remains high as primarily currencies of a few industrialized countries provide the largest contribution to the adjustment of the effective US dollar exchange rate. The paper finds that this heterogeneity is not only due to policy choices of inflexible exchange rate regimes, but to an important extent due to market forces, in particular business cycle synchronization and the degree of financial integration – foremost in portfolio investment – but not to trade. The findings have implications for a potential unwinding of global imbalances and future exchange rate adjustment, as well as for monetary policy choices in emerging market economies. JEL Classification: F31, F4, G1cross-rates, exchange rate, global distribution, heterogeneity, shocks, transmission channels, US dollar

Heterogeneity in Exchange Rate Expectations: Evidence on the Chartist-Fundamentalist Approach

This paper examines heterogeneity in exchange rate expectations. Whereas agents’ heterogeneity is key in modern exchange rate models, evidence on determinants of heterogeneity is weak so far. Our sample, covering expectations from about 300 forecasters over 15 years, shows remarkable time variation in dispersion. Determinants of dispersion are consistent with the chartist-fundamentalist approach: misalignments of the exchange rate and exchange rate changes explain heterogeneity. The risk premium influences heterogeneity as well, but possible impacts from macroeconomic variables and exchange rate’s volatility are dominated by the other determinants.exchange rate, heterogeneity, dispersion, chartists, fundamentalists

The Association Between Rate and Severity of Exacerbations in Chronic Obstructive Pulmonary Disease: An Application of a Joint Frailty-Logistic Model.

Exacerbations are a hallmark of chronic obstructive pulmonary disease (COPD). Evidence suggests the presence of substantial between-individual variability (heterogeneity) in exacerbation rates. The question of whether individuals vary in their tendency towards experiencing severe (versus mild) exacerbations, or whether there is an association between exacerbation rate and severity, has not yet been studied. We used data from the MACRO Study, a 1-year randomized trial of the use of azithromycin for prevention of COPD exacerbations (United States and Canada, 2006-2010; n = 1,107, mean age = 65.2 years, 59.1% male). A parametric frailty model was combined with a logistic regression model, with bivariate random effects capturing heterogeneity in rate and severity. The average rate of exacerbation was 1.53 episodes/year, with 95% of subjects having a model-estimated rate of 0.47-4.22 episodes/year. The overall ratio of severe exacerbations to total exacerbations was 0.22, with 95% of subjects having a model-estimated ratio of 0.04-0.60. We did not confirm an association between exacerbation rate and severity (P = 0.099). A unified model, implemented in standard software, could estimate joint heterogeneity in COPD exacerbation rate and severity and can have applications in similar contexts where inference on event time and intensity is considered. We provide SAS code (SAS Institute, Inc., Cary, North Carolina) and a simulated data set to facilitate further uses of this method

Proceedings of the Conference on Human and Economic Resources

Recent studies about estimating half-lives of purchasing power parity argues that heterogeneity bias resulting from aggregating the real exchange rate across sectors is important and should be taken into account. However, they do not use appropriate techniques to measure persistence. In this paper we use the extended median-unbiased estimation method in panel context for each sector separately and calculate both point estimates and confidence intervals. We conclude that controlling for sectoral heterogeneity bias and small sample bias will not solve the PPP puzzle.PPP persistence, real exchange rate, heterogeneity bias extended median-unbiased estimation, panel data