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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 persisten ....

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... 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 model, is that the flow of goods and services is the foundation for the equilibrating dynamic. Behind the flow of goods and services is the gap between the gap between, domestic and foreign short-term rates, and the steady state long-run interest rate gap that sets goods flows to zero. The assumption is that the prices of the domestic ...