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Noisy Financial Signals and Persistent Effects of Nominal Shocks in Open Economies

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  • Torben Andersen

    (University of Aarhus)

  • Niels C. Beier

    (University of Aarhus)

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    Abstract

    Floating exchange rates display substantial short-run volatility causing a nontrivial information problem in disentangling temporary from permanent changes. Although agents observe current market signals they are imperfectly informed about the future, but they accumulate information and learn over time. We analyze how this basic information problem in the presence of one-period nominal contracts affects the dynamic adjustment process to nominal shocks. Specifically we use a general equilibrium two-country model with specialized production and one-period nominal contracts and consider the propagation of nominal shocks. Informational problems are shown to have important qualitative and potentially strong quantitative importance for the propagation of nominal shocks.

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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1276.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1276

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    Cited by:
    1. Christian Pierdzioch, 2004. "Productivity Shocks and Delayed Exchange-Rate Overshooting," Kiel Working Papers 1199, Kiel Institute for the World Economy.
    2. Christian Pierdzioch, 2003. "Noise Trading and the Effects of Monetary Policy Shocks on Nominal and Real Exchange Rates," Kiel Working Papers 1140, Kiel Institute for the World Economy.
    3. Pierdzioch, Christian, 2005. "Noise trading and delayed exchange rate overshooting," Journal of Economic Behavior & Organization, Elsevier, vol. 58(1), pages 133-156, September.

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