Overview
Charles Engel is an economist at the University of Wisconsin–Madison and a research associate at NBER. He is a leading figure in international macroeconomics, best known for the Engel-Hamilton (1990) stochastic segmented trends model of exchange rates, the "exchange rate disconnect" puzzle, and research on uncovered interest parity, local-currency pricing, and optimal monetary policy in open economies. Not to be confused with Robert F. Engle (inventor of ARCH/GARCH).
Key Contributions / Features
- Long-run U.S./U.K. real exchange rate (Engel-Kim 1999) — "The Long-Run U.S./U.K. Real Exchange Rate," Journal of Money, Credit and Banking 31(3): 335–356. Decomposed 106 years of monthly data into permanent (Markov-switching random walk) and transitory (Markov-switching AR) components via Gibbs sampling; found a large permanent component rejecting PPP; demonstrated that ADF tests have 19% actual size at 5% nominal under MS heteroskedasticity; linked permanent component to Balassa-Samuelson productivity differentials. See Purchasing Power Parity.
- Stochastic segmented trends / long swings (Engel-Hamilton 1990) — Applied Hamilton's Markov-switching framework to quarterly dollar exchange rates (DM, franc, pound); showed persistent appreciations and depreciations are a genuine statistical phenomenon (rejected random walk at 5%); found that forward rates and interest differentials fail to predict regime changes, inconsistent with uncovered interest parity. See Uncovered Interest Parity.
- Exchange rate disconnect — Later work documenting that macroeconomic fundamentals (money supplies, output, interest rates) have very little predictive power for exchange rates at short-to-medium horizons, extending the Meese-Rogoff (1983) puzzle.
- Uncovered interest parity and the forward premium puzzle — Research on why interest differentials fail to predict exchange rate changes; peso problem and risk premium interpretations.
- Local-currency pricing — Theoretical and empirical work showing that import prices are sticky in the buyer's currency (incomplete exchange rate pass-through), with implications for international risk sharing and expenditure switching.
Related