Noise Trading and Exchange Rate Regimes

Olivier Jeanne and Andrew Rose

No 2142, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Both the literature and new empirical evidence show that exchange rate regimes differ primarily by the noisiness of the exchange rate, not by 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 alters the composition of the market and generates excess exchange rate volatility, since 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.

Keywords: Entry; Equilibria; Fundamentals; Macroeconomic; Monetary; Multiple; Risk; Volatility (search for similar items in EconPapers)
JEL-codes: F33 G15 (search for similar items in EconPapers)
Date: 1999-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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Related works:
Journal Article: Noise Trading and Exchange Rate Regimes (2002)
Working Paper: Noise Trading and Exchange Rate Regimes (1999)
Working Paper: Noise trading and exchange rate regimes (1999)
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