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Noise Trading and the Effects of Monetary Policy Shocks on Nominal and Real Exchange Rates

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Author Info
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.

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File URL: http://www.ifw-members.ifw-kiel.de/publications/noise-trading-and-the-effects-of-monetary-policy-shocks-on-nominal-and-real-exchange-rates/kap1140.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1140.

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Length: 32 pages
Date of creation: Jan 2003
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Handle: RePEc:kie:kieliw:1140

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Related research
Keywords: Monetary Policy Noise trading Exchange rate overshooting

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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