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Noise Trading and the Effects of Monetary Policy Shocks on Nominal and Real Exchange Rates

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  • Pierdzioch, Christian

Abstract

A number of empirical studies have reported the result that exchange rates show a delayed overshooting in response to monetary policy shocks. This result is puzzling. Economic theory suggests that the overshooting should occur immediately after the shock, not with a delay. This paper uses a ?new open economy macroeconomics? model with pricing-to-market to analyze whether the assumption of noise trading in the foreign exchange market helps to resolve the delayed overshooting puzzle. The implications of noise trading for the effects of monetary policy shocks on the nominal and on the real exchange rate are analyzed.

Suggested Citation

  • Pierdzioch, Christian, 2003. "Noise Trading and the Effects of Monetary Policy Shocks on Nominal and Real Exchange Rates," Kiel Working Papers 1140, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1140
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary Policy; Noise trading; Exchange rate overshooting;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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