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Monetary policy and inferential expectations of exchange rates

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  • Menzies, Gordon D.
  • Zizzo, Daniel John

Abstract

We present a macroeconomic market experiment to isolate the impact of monetary shocks on the exchange rate, as an alternative to SVAR identification. In a non-stochastic treatment, covered interest rate parity holds and predicted exchange rates are tracked well. In a stochastic treatment, we model expectations using a Neyman–Pearson hypothesis test (inferential expectations) and find evidence of belief conservatism and uncovered interest rate parity failure. The market environment magnifies belief conservatism, which is opposite to the standard claim that markets tend to eliminate individual choice anomalies.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 22 (2012)
Issue (Month): 2 ()
Pages: 359-380

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Handle: RePEc:eee:intfin:v:22:y:2012:i:2:p:359-380

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Web page: http://www.elsevier.com/locate/intfin

Related research

Keywords: Exchange rates; Market experiments; Belief conservatism; Inferential expectations; Uncovered interest parity;

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