Monetary policy and inferential expectations of exchange rates
Date
2012
Authors
Menzies, Gordon
Zizzo, Daniel
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Publisher
Elsevier
Abstract
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 belief conservatism, which is opposite to the standard claim that markets tend to eliminate individual choice anomalies.
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Keywords
Keywords: Belief conservatism; Exchange rates; Inferential expectations; Market experiments; Uncovered interest parity
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Source
Journal of International Financial Markets, Institutions and Money
Type
Journal article
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Restricted until
2037-12-31
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