A Gravity View of Exchange Rate Disconnect ∗

  title={A Gravity View of Exchange Rate Disconnect ∗},
  author={D. Fitzgerald},
The empirical “gravity” equation is extremely successful in explaining bilateral trade. This paper shows how a multi-country model of specialization and costly trade (i.e. a microfounded gravity model) can be applied to explain empirical exchange rate puzzles. One such puzzle is the fact that nominal exchange rates are enormously volatile, but that this volatility does not appear to affect inflation. The gravity model is very successful in explaining this puzzle. In a sample of 25 OECD… CONTINUE READING


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