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Monetary policy and inferential expectations of exchange rates

Menzies, Gordon; Zizzo, Daniel

Description

We present a macroeconomic market experiment to isolate the impact of monetary shocks on the exchange rate, as an alternative to SVAR identification. In a non-stochastic treatment, covered interest rate parity holds and predicted exchange rates are tracked well. In a stochastic treatment, we model expectations using a Neyman-Pearson hypothesis test (inferential expectations) and find evidence of belief conservatism and uncovered interest rate parity failure. The market environment magnifies...[Show more]

CollectionsANU Research Publications
Date published: 2012
Type: Journal article
URI: http://hdl.handle.net/1885/66188
Source: Journal of International Financial Markets, Institutions and Money
DOI: 10.1016/j.intfin.2011.11.001

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