The behavior of the nominal exchange rate at the beginning of disinflations
AbstractA standard rational expectations model would give strong predictions about the behavior of the nominal exchange rate at the beginning of a disinflation (a rise in interest rates): a substantial initial appreciation, followed by a steady depreciation. It largely conflicts actual observations, like the recent experience of Poland, Hungary, and Chile, where an initial appreciation was not followed by any systematic depreciation. The paper tries to explore whether rational expectations can be rescued by introducing noise and parameter learning. An optimistic learning case (worse than expected inflation data every period), or the combination of a pessimistic learning case (better than expected data every period) and a declining proportional risk content of the interest rate offers a potential explanation.
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Bibliographic InfoPaper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2003/1.
Length: 53 pages
Date of creation: 2003
Date of revision:
uncovered interest parity; rational expectations; parameter learning; monetary contraction; small macromodel.;
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- F31 - International Economics - - International Finance - - - Foreign Exchange
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- Zsolt Darvas & G�bor Rappai & Zolt�n Schepp, 2006.
"Uncovering Yield Parity: A new insight into the UIP puzzle through the stationarity of long maturity forward rates,"
DNB Working Papers
098, Netherlands Central Bank, Research Department.
- Zsolt Darvas & GÃ¡bor Rappai & ZoltÃ¡n Schepp, 2007. "Uncovering Yield Parity: A New Insight into the UIP Puzzle through the Stationarity of Long Maturity Forward Rates," Money Macro and Finance (MMF) Research Group Conference 2006 84, Money Macro and Finance Research Group.
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