Kiel Working Papers, Kiel Institute for World Economics
No 1109:
Exchange Rate Expectations Redux and Monetary Policy
Christian Pierdzioch
Abstract: This paper uses a dynamic general equilibrium optimizing
two-country model to analyze how the formation of exchange rate
expectations shapes the effects of monetary policy shocks in open
economies. The model implies that the short-run output effects of permanent
monetary policy shocks diminish if 'noise traders' in the foreign exchange
market form regressive exchange rate expectations. If the influence of
these noise traders is strong enough, a permanent expansionary monetary
policy shock can result in a temporary decline of the output in the country
in which it takes place. The output effects of temporary monetary policy
shocks are magnified when noise traders form regressive exchange rate
expectations.
Keywords: Monetary policy; Exchange rate expectations; Noise trading; (follow links to similar papers)
JEL-Codes: F31; F41; G15; (follow links to similar papers)
32 pages, May 2002
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