Real frictions drive significant exchange rate volatility, impacting global economies.
This article explores why exchange rates can suddenly change a lot. By looking at how real-world factors like costs and biases affect exchange rates, the researchers found that these factors can cause big swings in exchange rates. They also found that when banks face difficulties, it can make exchange rates even more unstable. Overall, the study suggests that real-world issues, not just money-related ones, can play a big role in how exchange rates move.