Noise Trading and Exchange Rate Regimes, Issue 7104
National Bureau of Economic Research, 1999 - Cuestión monetaria - Modelos econométricos - 38 pages
Both the literature and new empirical evidence show that exchange rate regimes differ primarily by the noisiness of the exchange rate, not be measurable macroeconomic fundamentals. This motivates a theoretical analysis of exchange rate regimes with noise traders. The presence of noise traders can lead to multiple equilibria in the foreign exchange market. The entry of noise traders both create and share the risk associated with exchange rate volatility. In such circumstances, monetary policy can be used to lower exchange rate volatility without altering macroeconomic fundamentals
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analysis average risk premium benefit of entry bonds denominated closed-form expression countries data set decision of noise domestic currency empirical endogenize enter the foreign entry cost entry decision entry of noise equilibrium with low evidence excess return exchange rate policy exchange rate regimes exchange rate target exchange rate variability exchange rate volatility exogenous fixed exchange rate floating exchange rates Flood and Rose foreign bonds market foreign exchange market foreign market Free searchable abstracts Fundamental Variance hard copy i.i.d. normal informed traders instructions inside interest rate International Joel Watson Krugman and Miller low exchange rate macroeconomic fundamentals macroeconomic models macroeconomic volatility Marginal Noise Trader monetary authorities monetary policy monetary process money supply multiple equilibria Mussa natural logarithm NBER Working Papers number of noise papers in hard Partial Subscription portfolio rate target zone rational expectations reduce exchange rate stochastic structure stylized fact trader j's Var(e www.nber.org Free searchable