Noise Trading and Exchange Rate Regimes
Title: Noise Trading and Exchange Rate Regimes
Publisher: M I T Press
Citation: Quarterly Journal of Economics, 2002, 117, 2, 537-569
Policy-makers often justify their choice of fixed exchange rate regimes as a shelter against nonfundamental influences in the foreign exchange market. This paper proposes a framework, based on endogenous noise trading, which makes sense of the policy-makers' view. We show that as a result of multiple equilibria, the model violates Mundell's Incompatible Trinity: under some conditions, it is possible to reduce the volatility of the exchange rate without any sacrifice in terms of monetary autonomy. We provide empirical evidence supportive of the existence of a nonfundamental channel in the link between exchange rate regimes and exchange rate volatility.
Files in this item
There are no files associated with this item.