Monetary policy and inferential expectations of exchange rates
- Publication Type:
- Journal Article
- Journal of International Financial Markets, Institutions and Money, 2012, 22 (2), pp. 359 - 380
- Issue Date:
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. © 2011 Elsevier B.V.
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