Non-rational Beliefs in an Open Economy

10:00-11:30, Wednesday, July 1, 2020

Tencent Meeting (Meeting ID: 976 808 862)

Dr. Qingyuan DU is currently a senior lecturer at the Department of Economics, Monash University. He obtained PhD from Columbia University in 2011. His main research fields are international economics, macroeconomics and Chinese economy. His works have appeared in Journal of International Economics, European Economic Review and Economics Letters.

Personal Website: https://research.monash.edu/en/persons/qingyuan-du

This paper proposes a new theory of exchange rate determination. Under arbitrary beliefs, the exchange rate is determined by an equilibrium restriction which we call the generalized no-arbitrage condition. The pricing function predicts endogenous departures from the conventional rational expectations uncovered interest parity condition. In an empirical open-economy model with learning, using Canadian and United States data, we evaluate whether learning can account for exchange rate dynamics and reduce reliance on exogenous risk-premium shocks to explain departures from uncovered interest parity. Reminiscent of Justiniano and Preston (2010a), we find learning dynamics help explain the persistence and volatility of exchanges rates but generate counter-factual predictions on international macroeconomic comovement, requiring use of exogenous risk-premium shocks.

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