Monetary policy and inferential expectations of exchange rates

Gordon Menzies, Daniel Zizzo

    Research output: Contribution to journalArticle

    Abstract

    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.
    Original languageEnglish
    Pages (from-to)359-380
    JournalJournal of International Financial Markets, Institutions and Money
    Volume22
    Issue number2
    DOIs
    Publication statusPublished - 2012

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