Is the Honeymoon Effect Valid in the Presence of Both Exchange Rate and Output Expectations? A Graphical Analysis

14 Pages Posted: 22 Apr 2005

See all articles by Chung-Rou Fang

Chung-Rou Fang

National Chengchi University (NCCU) - Department of Economics

Juin-jen Chang

Academia Sinica

Ching-Chong Lai

Academia Sinica

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

Fang, Chung-Rou and Chang, Juin-Jen and Lai, Ching-Chong, Is the Honeymoon Effect Valid in the Presence of Both Exchange Rate and Output Expectations? A Graphical Analysis (March 2005). Available at SSRN: https://ssrn.com/abstract=708842 or http://dx.doi.org/10.2139/ssrn.708842

Chung-Rou Fang

National Chengchi University (NCCU) - Department of Economics ( email )

Taipei 116
Taiwan

Juin-Jen Chang

Academia Sinica ( email )

Economics
Nankang, Taipei 115
Taiwan

Ching-Chong Lai (Contact Author)

Academia Sinica ( email )

Sun Yat-Sen Institute for Social Sciences and Phil
Nankang, Taipei 115
Taiwan

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