Kiel Working Papers, Kiel Institute for World Economics
No 1140:
Noise Trading and the Effects of Monetary Policy Shocks on Nominal and Real Exchange Rates
Christian Pierdzioch
Abstract: A number of empirical studies have reported the result
that exchange rates show a delayed overshooting in response to monetary
policy shocks. This result is puzzling. Economic theory suggests that the
overshooting should occur immediately after the shock, not with a delay.
This paper uses a new open economy macroeconomics model with
pricing-to-market to analyze whether the assumption of noise trading in the
foreign exchange market helps to resolve the delayed overshooting puzzle.
The implications of noise trading for the effects of monetary policy shocks
on the nominal and on the real exchange rate are analyzed.
Keywords: Monetary Policy; Noise trading; Exchange rate overshooting; (follow links to similar papers)
JEL-Codes: F31; F32; F41; (follow links to similar papers)
32 pages, January 2003
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