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Exchange Rate Expectations Redux and Monetary Policy

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  • Pierdzioch, Christian

Abstract

This paper uses a dynamic general equilibrium optimizing two-country model to analyze how the formation of exchange rate expectations shapes the effects of monetary policy shocks in open economies. The model implies that the short-run output effects of permanent monetary policy shocks diminish if 'noise traders' in the foreign exchange market form regressive exchange rate expectations. If the influence of these noise traders is strong enough, a permanent expansionary monetary policy shock can result in a temporary decline of the output in the country in which it takes place. The output effects of temporary monetary policy shocks are magnified when noise traders form regressive exchange rate expectations.

Suggested Citation

  • Pierdzioch, Christian, 2002. "Exchange Rate Expectations Redux and Monetary Policy," Kiel Working Papers 1109, Kiel Institute for the World Economy.
    • Handle: RePEc:zbw:ifwkwp:1109
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    References listed on IDEAS

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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