Households' Preferences and Exchange Rate Overshooting

Christian Pierdzioch

International Economic Journal, 2007, vol. 21, issue 2, 297-316

Abstract: This paper uses a 'New-Open-Economy Macroeconomic' model to study the effect of a shock to Households' preferences on exchange rate dynamics. The special features of the model are that Households' preferences exhibit a 'catching-up with the Joneses' effect and that international financial markets are imperfectly integrated. Results of numerical simulations of the model demonstrate that these features imply that, in an otherwise standard 'New-Open-Economy Macroeconomic' model, a shock to Households' preferences can give rise to an overshooting of the exchange rate.

Keywords: Preference shock; financial markets; catching-up with the Joneses; exchange rate overshooting (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1080/10168730701345356

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