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Beginning of Paper
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Long Swings in the Exchange Rate and the Excess Returns Puzzle: The Role of
Imperfect Knowledge
Long Swings in the Exchange Rate and the Excess Returns Puzzle: The Role of
Imperfect Knowledge
The paper is a clear breath of "dirty" air in the sterile world of perfect
foresight. The authors offer a ....
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Middle of Paper
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.... that the prices of the domestic and foreign goods in their respective for-
eign currencies are "incorrect" based on the fundamentals of the respective
countries and that agents know this (and know that the exchange rate path is
unstable) but cannot be sure of the de-gree of "incorrectness" or the
persistence of the di vergence. Embedded into this model are as-sumptions about
PPP that provide comfort about this benchmark's ability to give the "correct"
relative prices. It is possible that these assumptions, to some degree, mask
the complexity of the situation with respect to PPP's abil ....
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SUBJECTS
