Publication

This paper analyzes the empirically found phenomenon that exchange rates show a delayed overshooting in response to monetary policy shocks, although economic theory suggests an immediate impact. The author uses a 'new open economy macroeconomics' model with pricing-to-market to analyze whether the assumption of noise trading in the foreign exchange market helps to resolve the delayed overshooting puzzle. Furthermore, he discusses the implications of noise trading for the effects of monetary policy shocks on the nominal and on the real exchange rate.