Template-Type: ReDIF-Paper 1.0
Author-Name: Péter Benczúr
Author-X-Name-First: Péter
Author-X-Name-Last: Benczúr
Author-Email: benczurp@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank

Title: The behavior of the nominal exchange rate at the beginning of disinflations

Abstract: A standard rational expectations model would give strong predictions about the behavior of the nominal exchange rate at the beginning of a disinflation (a rise in interest rates): a substantial initial appreciation, followed by a steady depreciation. It largely conflicts actual observations, like the recent experience of Poland, Hungary, and Chile, where an initial appreciation was not followed by any systematic depreciation. The paper tries to explore whether rational expectations can be rescued by introducing noise and parameter learning. An optimistic learning case (worse than expected inflation data every period), or the combination of a pessimistic learning case (better than expected data every period) and a declining proportional risk content of the interest rate offers a potential explanation.

Length: 53 pages
Creation-Date: 2003
File-URL: http://www.mnb.hu/letoltes/wp2003-1.pdf
File-Format: Application/pdf

Number: 2003/1
Classification-JEL: D83, E4, E5, F31.
Keywords: uncovered interest parity, rational expectations, parameter learning, monetary contraction, small macromodel.
Handle: RePEc:mnb:wpaper:2003/1