| This dissertation studies various dimensions of real exchange rate behavior. Chapter 1 shows that a model with limited enforcement of international financial contracts can explain two major puzzles about exchange rates: the exchange rate volatility puzzle (real exchange rates are much more volatile than other macroeconomic variables) and the negative correlation between the real exchange rate and relative consumption (Backus-Smith puzzle).; In Chapter 2, I ask the question whether a model of limited enforcement can in addition account for the high volatility of asset prices. Unfortunately, this does not seem to be the case. If domestic markets are complete and frictionless, but international markets are complete and suffer from limited enforcement, the model generates high real exchange rate volatility and a negative correlation of the real exchange rate with relative consumption. However, asset prices are not volatile enough. If I assume that there is also limited enforcement in the domestic financial markets, the model still correctly predicts a negative correlation between the real exchange rate and relative consumption. Also, asset prices become approximately as volatile as in the data. However, as the model implies very limited international risk sharing, the real exchange rate becomes much too volatile.; Chapter 3 analyzes different exchange rate regimes as exogenous commitment devices for monetary policy. In addition to the well known inflationary bias, the time inconsistency problem can induce expectation traps and perverse policy responses to real shocks. Both phenomena imply that flexible exchange rates may feature larger macroeconomic volatility than fixed exchange rates. |
