What's news in exchange rate dynamics: A DSGE approach

This paper examines the medium and long-term impacts of economic news on exchange rate movements. We extend a standard new open economy macroeconomics model by allowing anticipated (news) shocks in purchasing power parity and real interest rates, and perform a structural Bayesian estimation. Using 20 years of quarterly data from the US and the euro area, we find that anticipated shocks account for more than 40 percent of exchange rate fluctuations.