Learning and the exchange rate: exchange rate responses to money announcements in the early 1980s

The paper develops a monetary model of exchange rate determination with transitory monetary shocks and Bayesian learning. The model implies that exchange rate responses to monetary surprises are time-varying and asymmetric. Furthermore, the two variables become increasingly negatively correlated as...

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Bibliographic Details
Published in:Journal of international money and finance 1996-04, Vol.15 (2), p.167-190
Main Author: Peruga, Rodrigo
Format: Article
Language:English
Subjects:
Bayesian analysis
Economic models
Foreign exchange rates
Learning
Monetary policy
Monetary theory
Statistical analysis
Studies
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Summary:The paper develops a monetary model of exchange rate determination with transitory monetary shocks and Bayesian learning. The model implies that exchange rate responses to monetary surprises are time-varying and asymmetric. Furthermore, the two variables become increasingly negatively correlated as beliefs converge. An empirical section reexamines the evidence of dollar exchange rate responses to monetary announcements in the 1979–1984 period during which two monetary reforms took place in the USA. There is strong support for the presence of learning behavior during the October 1979 to October 1982 period in the German mark and Japanese yen equations.
ISSN:0261-5606
1873-0639
DOI:10.1016/0261-5606(96)00004-6