infonet-economy

This introductory umbrella chapter interlinks the three essays of this dissertation thesis and explains their stance towards the economic discipline. The essays focus on two key exchange rate puzzles, which are the forward premium puzzle of Fama (1984) and the consumption real exchange rate correlation puzzle of Backus and Smith (1993). As regards the first puzzle, this thesis explains the surprisingly predictable currency returns as a hedge of macroeconomic risk. The first essay argues that the cross-sectional distribution of consumption among OECD countries explains currency returns, and the second essay highlights the Swiss franc, which is a safe haven currency and therefore particularly driven by global risk. The third essay proposes that consumer prices within the Eurozone behave conforming to standard macroeconomic theory thus attenuating the puzzle of Backus and Smith. The three essays of this thesis present reduced form empirical models and interpret results taking guidance from state of-the-art structural models. Such baseline models generally fail to precisely generate the observed patterns in the data. But being aware of this, this thesis demonstrates how powerful these simple models nevertheless are to understand empirical correlations.