Monetary policy and inferential expectations of exchange rates

Date

2012

Authors

Menzies, Gordon
Zizzo, Daniel

Journal Title

Journal ISSN

Volume Title

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.

Description

Keywords

Keywords: Belief conservatism; Exchange rates; Inferential expectations; Market experiments; Uncovered interest parity

Citation

Source

Journal of International Financial Markets, Institutions and Money

Type

Journal article

Book Title

Entity type

Access Statement

License Rights

Restricted until

2037-12-31