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 well worked out model of how agents persistently bid the exchange rate away from the expected long-run equilibrium rate. It seems intuitively comfortable to see the mathematical justification for the unexplained excess returns to be a function of the distance from the bench-mark (PPP). The uncertainty of a switch occurr....

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