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Noise Trading and Exchange Rate Regimes

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  • Olivier Jeanne
  • Andrew K. Rose

Abstract

Both the literature and new empirical evidence show that exchange rate regimes differ primarily by the noisiness of the exchange rate, not be measurable macroeconomic fundamentals. This motivates a theoretical analysis of exchange rate regimes with noise traders. The presence of noise traders can lead to multiple equilibria in the foreign exchange market. The entry of noise traders both create and share the risk associated with exchange rate volatility. In such circumstances, monetary policy can be used to lower exchange rate volatility without altering macroeconomic fundamentals.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7104.

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Date of creation: Apr 1999
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Publication status: published as Olivier Jeanne & Andrew K. Rose, 2002. "Noise Trading And Exchange Rate Regimes," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 537-569, May.
Handle: RePEc:nbr:nberwo:7104

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