Exchange Rates, Natural Rates, and the Price of Risk (joint with Rohan Kekre)

Abstract
"We study the source of exchange rate fluctuations using a general equilibrium
model accommodating shocks in goods and financial markets. These
shocks differ in their induced comovements between exchange rates, interest
rates, and quantities. A calibration matching data from the U.S. and G10
currency countries implies that persistent shocks to relative demand and thus
interest rate differentials account for 80% of the volatility in the dollar/G10
exchange rate. Shocks to currency intermediation are important, however, in
generating deviations from uncovered interest parity at high frequencies and
explaining the dollar appreciation in crises."

Full paper