Noise Trading and Exchange Rate Regimes

Reserve Bank of New Zealand Discussion Paper No. G99/2

32 Pages Posted: 3 Mar 2003

See all articles by Andrew Kenan Rose

Andrew Kenan Rose

University of California - Haas School of Business; NUS Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Olivier Jeanne

International Monetary Fund (IMF) - Research Department; Ecole Nationale des Ponts et Chaussees (ENPC); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: 1999

Abstract

Both the literature and new empirical evidence show that exchange rate regimes differ primarily by the noisiness of the exchange rate, not by 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 alters the composition of the market and generates excess exchange rate volatility, since 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.

JEL Classification: F33, C15

Suggested Citation

Rose, Andrew Kenan and Rose, Andrew Kenan and Jeanne, Olivier, Noise Trading and Exchange Rate Regimes (1999). Reserve Bank of New Zealand Discussion Paper No. G99/2, Available at SSRN: https://ssrn.com/abstract=348200 or http://dx.doi.org/10.2139/ssrn.348200

Andrew Kenan Rose (Contact Author)

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