Selander, Carina () (Department of Economics, Umeå University)
Abstract
This thesis consists of four papers, of which paper 1 and 4 are co-written with Mikael Bask. Paper [1]
implements chartists trading in a sticky-price monetary model for determining the exchange rate. It is
demonstrated that chartists cause the exchange rate to "overshoot the overshooting equilibrium" of a
sticky-price monetary model. Chartists base their trading on a short-long moving average. The
importance of technical trading depends inversely on the time horizon in currency trade. The exchange
rate's perfect foresight path near long-run equilibrium is derived and it is demonstrated that the shorter
the time horizon, the greater the exchange rate overshooting.
The aim of Paper [2] is to see how the dynamics of the basic target zone model changes when
chartists and fundamentalists are introduced. Chartists use technical trading and the relative importance
of technical and fundamental analyses depend on the time horizon in currency trade. The model also
includes realignment expectations, which increase with the weight of chartists. The introduction of
chartists may significantly reduce and reverse, the so-called "honeymoon effect" of a fully credible
target zone. Further, chartists may cause the correlation between the exchange rate and the
instantaneous interest rate differential to become either positive or negative.
Using a chartist-fundamentalist set-up, Paper [3] derives the effects on the current exchange rate of
central bank intervention. Fundamentalists have rational expectations and chartists use so called
support and resistance levels in their trading. This technique results in chartists having both
bandwagon expectations and regressive expectations. Chartists may enhance or suppress the effect of
intervention depending on their expectations. The results indicate that a chartist channel exists.
The aim of Paper [4] is threefold; (i) to investigate if there is a unique rational expectations
equilibrium (REE) in a new Keynesian macroeconomic model augmented with technical trading, (ii),
to investigate if the unique REE is adaptively learnable and, (iii), to investigate if this unique and
adaptively learnable REE is desirable in an inflation rate targeting regime. The monetary authority is
using a Taylor rule when setting the interest rate. A main conclusion is that a robust Taylor rule
implies that the monetary authority should increase (decrease) the interest rate when the CPI inflation
rate increases (decreases) and when the currency gets stronger (weaker).
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Publisher Info
Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number
698.
Length: 230 pages Date of creation: 20 Nov 2006 Date of revision: Handle: RePEc:hhs:umnees:0698
Contact details of provider: Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden Phone: 090 - 786 61 42 Fax: 090 - 77 23 02 Email: Web page: http://www.econ.umu.se/ More information through EDIRC
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Find related papers by JEL classification: E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy F31 - International Economics - - International Finance - - - Foreign Exchange F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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