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Exchange Rates, Expectations, and Monetary Policy: a NOEM Perspective

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  • Christian Pierdzioch
  • Georg Stadtmann

Abstract

We use a dynamic general‐equilibrium optimizing two‐country model to analyze how the formation of exchange rate expectations shapes the effects of a monetary policy shock in an open economy. We also provide empirical evidence on how traders in foreign exchange markets form exchange rate expectations. Our model implies that the short‐run output effect of a permanent monetary policy shock diminishes if “technical traders” form the type of regressive exchange rate expectations we find in our empirical analysis. If the influence of technical 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 effect of a temporary monetary policy shock is magnified when technical traders form regressive exchange rate expectations.

Suggested Citation

  • Christian Pierdzioch & Georg Stadtmann, 2007. "Exchange Rates, Expectations, and Monetary Policy: a NOEM Perspective," Review of International Economics, Wiley Blackwell, vol. 15(2), pages 252-268, May.
    • Handle: RePEc:bla:reviec:v:15:y:2007:i:2:p:252-268
    DOI: 10.1111/j.1467-9396.2007.00641.x
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    References listed on IDEAS

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    1. Andersen, Torben M & Beier, Niels C, 2000. "Noisy Financial Signals and Persistent Effects of Nominal Shocks in Open Economies," CEPR Discussion Papers 2360, C.E.P.R. Discussion Papers.
    2. Torben Andersen & Niels C. Beier, 2000. "Noisy Financial Signals and Persistent Effects of Nominal Shocks in Open Economies," Econometric Society World Congress 2000 Contributed Papers 1276, Econometric Society.
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    Cited by:

    1. Pierdzioch, Christian & Schäfer, Dirk & Stadtmann, Georg, 2010. "Fly with the eagles or scratch with the chickens? Zum Herdenverhalten von Wechselkursprognostikern," Discussion Papers 287, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.

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