Working Paper: NBER ID: w7104
Authors: Olivier Jeanne; Andrew K. Rose
Abstract: Both the literature and new empirical evidence show that exchange rate regimes differ primarily by the noisiness of the exchange rate, not be measurable macroeconomic fundamentals. This motivates a theoretical analysis of exchange rate regimes with noise traders. The presence of noise traders can lead to multiple equilibria in the foreign exchange market. The entry of noise traders both create and share the risk associated with exchange rate volatility. In such circumstances, monetary policy can be used to lower exchange rate volatility without altering macroeconomic fundamentals.
Keywords: No keywords provided
JEL Codes: F33; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Noise traders (G19) | Multiple equilibria (D59) |
| Multiple equilibria (D59) | Exchange rate volatility (F31) |
| Noise traders (G19) | Exchange rate volatility (F31) |
| Monetary policy (E52) | Exchange rate volatility (F31) |
| Monetary policy (E52) | Noise trader entry (G19) |
| Noise trader entry (G19) | Exchange rate volatility (F31) |