Part one of term paper
Long Swings in the Exchange Rate and the Excess Returns Puzzle: The Role of William Strauss The paper is a clear breath of "dirty" air in the sterile world of perfect foresight. The authors offer a well worked out model of how agents persistently bid the exchange rate away from the expected long-run equilibrium rate. It seems intuitively co ...

Part two of term paper
... many other areas of economic modeling in which expectations are at the core of the model's dynamics. Of course, the choice of the benchmark is key to the mechanics of the process. In this case, PPP is an obvious choice… but, since the idea of PPP drives this model so strongly, it is interesting to look at its place and its characteristics. In the paper, the authors note that if PPP holds, "relative excess demand for domestic and foreign goods is zero." The obvious suggestion, based on the m ...