Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212031 
Authors: 
Year of Publication: 
2006
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 6/2006
Publisher: 
Bank of Finland, Helsinki
Abstract: 
The aim of this paper is to analyse the announcement effects on exchange rate movements using the basic asset pricing model, where currency trade is partly determined by technical trading in the form of moving averages since it is the most commonly used technique according to questionnaire surveys.Specifically, the announcement and implementation of temporary as well as permanent monetary policy are analysed, where the exchange rate model developed is summarised in a linear difference equation in current exogenous fundamentals, a large number of lags of the endogenous exchange rate and time-t dating of exchange rate expectations. However, since there are a large number of rational expectations equilibria, continuity is proposed as a selection criterion among the equilibria, meaning that the parameter for the time-t - 1 exchange rate should have the limit 0 when there is no technical trading to have an economically meaningful equilibrium.It turns out that there is a unique rational expectations equilibrium that satisfy the continuity criterion, and focusing on this equilibrium, it is shown that the exchange rate is much more sensitive to changes in money supply than when technical trading is absent in currency trade.This result is important since it sheds light on the so-called exchange rate disconnect puzzle in international finance.
Subjects: 
asset pricing
exchange rate disconnect puzzle
heterogeneous agents
least squares learnability
monetary policy and technical trading
JEL: 
E51
E52
F31
G12
Persistent Identifier of the first edition: 
ISBN: 
952-462-270-X
Document Type: 
Working Paper

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