Exchange rate volatility without the contrivance of fundamentals and the failure of PPP
Bask, Mikael (05.03.2006)
Numero
8/2006Julkaisija
Suomen Pankki
2006
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-20140807285Tiivistelmä
Since the magnitude of exchange rate overshooting may not be the same for different exchange rates of a currency, a monetary expansion or contraction in, for example, the EMU, will affect the exchange rate between the U.S. dollar and the yen, even though there are no changes in monetary fundamentals in the U.S. or Japan. This fact is demonstrated in a sticky-price monetary model due originally to Dornbusch (1976) that is enlarged with currency traders that use Chartism in the form of moving averages.It is also demonstrated that purchasing power parity (PPP) does not necessarily hold in long-run equilibrium.These results are interesting since, according to the empirical literature, there are often large movements in nominal exchange rates that are apparently unexplained by macroeconomic fundamentals, and there is also a weak support for PPP.Key words: Chartism, foreign exchange, macroeconomic fundamentals, moving averages, overshooting and PPP JEL classification numbers: F31, F41
Julkaisuhuomautus
Published in Frontiers in Finance and Economics (forthcoming)