Is the Honeymoon Effect Valid in the Presence of Both Exchange Rate and Output Expectations? A Graphical Analysis
14 Pages Posted: 22 Apr 2005
Date Written: March 2005
Abstract
This paper sets up a modified Mundell-type economy embodying both exchange-rate and output expectations, and develops a graphical exposition to explain the conflicting outcome between Krugman's (1991) prediction and the empirical observations in the regime of exchange rate target zones. We find that Krugman's (1991) honeymoon effects stem from his emphasis on exchange-rate expectations. If both exchange-rate expectations and output expectations are taken into the picture, then they will generate two conflicting effects to the realization of the nominal exchange rate, and hence the honeymoon effect may not exist.
Keywords: Exchange rate target zones, Exchange-rate expectations, Output expectations
JEL Classification: F31, E52
Suggested Citation: Suggested Citation