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Is the honeymoon effect valid in the presence of both exchange rate and output expectations? A graphical analysis

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  • Lai, Ching-chong
  • Fang, Chung-rou

Abstract

This paper sets up a modified Mundell-type economy embodying a New Keynesian “forward-looking” exchange-rate and output expectations, and develops a graphical exposition to explain the conflicting outcome between Krugman's (1991) prediction and the empirical observations in the regime of exchange rate target zones. We find that Krugman's (1991) honeymoon effects stem from his emphasis on exchange-rate expectations. If both exchange-rate expectations and output expectations are brought into the picture, they will then generate two conflicting effects to the realization of the nominal exchange rate, and hence the honeymoon effect may not exist.

Suggested Citation

  • Lai, Ching-chong & Fang, Chung-rou, 2012. "Is the honeymoon effect valid in the presence of both exchange rate and output expectations? A graphical analysis," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 140-146.
  • Handle: RePEc:eee:reveco:v:21:y:2012:i:1:p:140-146
    DOI: 10.1016/j.iref.2011.05.008
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    References listed on IDEAS

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    1. Robert P. Flood & Peter M. Garber, 1991. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1367-1372.
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    Cited by:

    1. Mensi, Walid & Hammoudeh, Shawkat & Yoon, Seong-Min, 2014. "Structural breaks and long memory in modeling and forecasting volatility of foreign exchange markets of oil exporters: The importance of scheduled and unscheduled news announcements," International Review of Economics & Finance, Elsevier, vol. 30(C), pages 101-119.

    More about this item

    Keywords

    Exchange rate target zones; Exchange-rate expectations; New Keynesian model; Output expectations;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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