“Robustness and Exchange Rate Volatility” by Kenneth Kasa
Economics Seminar
Authors:
Kenneth Kasa
Simon Fraser UniversityEdouard Djeudtem
Simon Fraser University
This paper studies exchange rate volatility within the context of the monetary model of exchange rates. We assume agents regard this model as merely a benchmark, or reference model, and attempt to construct forecasts that are robust to model misspecification. We show that revisions of robust forecasts are more volatile than revisions of nonrobust forecasts, and that empirically plausible concerns for model misspecification can easily explain observed exchange rate volatility.
