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Abstract. This paper provides a selective overview of puzzles in exchange rate economics. We begin with the forward bias puzzle: high interest rate currencies appreciate when one might guess that investors would demand higher interest rates on currencies expected to fall in value. We then analyse the purchasing power parity puzzle: the real exchange rate displays no (strong) reversion to a stable long‐run equilibrium level. Finally, we cover the exchange rate disconnect puzzle: the lack of a link between the nominal exchange rate and economic fundamentals. For each puzzle, we critically review the literature and speculate on potential solutions. JEL classification: F31

This paper proposes an empirical growth model which is consistent with a stochastic steady‐state labour productivity level varying over time and across countries, where the disequilibrium mechanism leading to long‐run equilibrium follows a nonlinear equilibrium correction model. Using data for the G7 economies during the postwar period since 1950, the empirical analysis yields a long‐run model which implies plausible estimates of the production function parameters. Postwar economic growth in each of the G7 countries appears to be well characterized by a nonlinear equilibrium correction model where the dynamic adjustment towards long‐run equilibrium is governed by a logistic function, while also capturing spillover effects in growth dynamics.

Although the long–run purchasing power parity (PPP) hypothesis is expected to hold across tradable goods, all price indices available to researchers for testing the validity of PPP contain some proportion of non–tradable goods prices, which may generate substantial persistence in the real exchange rate. We construct time series for quarterly price indices that minimize the presence of non–tradable goods for six major economies. Applying recently developed nonlinear econometric techniques to the resulting five US dollar real exchange rate series for the recent floating exchange rate regime, we provide evidence that the nonlinear mean reverting properties of these real exchange rate series are stronger than the mean reverting properties of real exchange rate time series constructed using the consumer price index (CPI). In turn, these results have a natural economic interpretation.(J.E.L.: F31).

In this paper we investigate the difference between the short‐run and the long‐run savings–investment correlation coefficient, in order to shed light both on the validity of the Feldstein–Horioka regression as a means of measuring the degree of capital mobility and on its implications. Using quarterly UK data, we also examine the effectiveness of the abolition of exchange control which, in October 1979, ended a long period of restrictions on capital flows between the UK and the international economy. We find that, consistent with the logical implication of the Feldstein–Horioka regression, the short‐run correlation is significantly higher than the long‐run correlation. In contrast with much of the literature employing the Feldstein–Horioka interpretation, however, the results suggest that the UK is highly financially integrated with the global economy post 1979.