Monetary policy and inferential expectations of exchange rates

Menzies, Gordon D. and Zizzo, Daniel John (2012) Monetary policy and inferential expectations of exchange rates. Journal of International Financial Markets, Institutions & Money, 22 (2). pp. 359-380.

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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.

Item Type: Article
Faculty \ School: Faculty of Social Sciences > School of Economics
Depositing User: Julie Frith
Date Deposited: 09 Feb 2012 12:10
Last Modified: 31 Aug 2023 12:30
DOI: 10.1016/j.intfin.2011.11.001

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