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Households' Preferences and Exchange Rate Overshooting

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  • Christian Pierdzioch

Abstract

This paper uses a 'New-Open-Economy Macroeconomic' model to study the effect of a shock to Households' preferences on exchange rate dynamics. The special features of the model are that Households' preferences exhibit a 'catching-up with the Joneses' effect and that international financial markets are imperfectly integrated. Results of numerical simulations of the model demonstrate that these features imply that, in an otherwise standard 'New-Open-Economy Macroeconomic' model, a shock to Households' preferences can give rise to an overshooting of the exchange rate.

Suggested Citation

  • Christian Pierdzioch, 2007. "Households' Preferences and Exchange Rate Overshooting," International Economic Journal, Taylor & Francis Journals, vol. 21(2), pages 297-316.
  • Handle: RePEc:taf:intecj:v:21:y:2007:i:2:p:297-316
    DOI: 10.1080/10168730701345356
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    Cited by:

    1. Pippenger, John, 2008. "Freely Floating Exchange Rates Do Not Systematically Overshoot," University of California at Santa Barbara, Economics Working Paper Series qt97m8z6hw, Department of Economics, UC Santa Barbara.

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