Monetary policy and inferential expectations of exchange rates

Gordon Menzies and Daniel Zizzo

Journal of International Financial Markets, Institutions and Money, 2012, vol. 22, issue 2, 359-380

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.

Keywords: Exchange rates; Market experiments; Belief conservatism; Inferential expectations; Uncovered interest parity (search for similar items in EconPapers)
JEL-codes: C91 D84 E50 F31 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:22:y:2012:i:2:p:359-380

DOI: 10.1016/j.intfin.2011.11.001

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