Noise trading and delayed exchange rate overshooting Pierdzioch, Christian

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Pierdzioch, Christian
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Journal of Economic Behavior & Organization
Financial markets -- Analysis; Foreign exchange -- Prices and rates; Monetary policy -- Forecasts and trends
To link to full-text access for this article, visit this link: Byline: Christian Pierdzioch Keywords: Monetary policy; Noise trading; Exchange rate overshooting Abstract: A number of empirical studies have reported that exchange rates show a delayed overshooting in response to a monetary policy shock. This finding is puzzling. Economic theory suggests that overshooting should occur immediately after the shock (i.e., with no delay). This paper uses a 'new open economy macroeconomics' model with pricing-to-market behavior to analyze whether noise trading in the foreign exchange market helps to explain the delayed overshooting puzzle. To this end, the implications of noise trading for the effects of a monetary policy shock on the nominal and on the real exchange rate are analyzed. Author Affiliation: Kiel Institute for World Economics, Duesternbrooker Weg 120, 24100 Kiel, Germany Article History: Received 28 April 2003; Revised 2 September 2003; Accepted 8 January 2004
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