Households' Preferences and Exchange Rate Overshooting |
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Authors: | Christian Pierdzioch |
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Institution: | 1. Saarland University , Saarbruecken, Germany c.pierdzioch@mx.uni-saarland.de |
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Abstract: | Abstract This paper uses a ‘New-Open-Economy Macroeconomic’ model to study the effect of a shock to Households' preferences on exchange rate dynamics. The special features of the model are that Households' preferences exhibit a ‘catching-up with the Joneses’ effect and that international financial markets are imperfectly integrated. Results of numerical simulations of the model demonstrate that these features imply that, in an otherwise standard ‘New-Open-Economy Macroeconomic’ model, a shock to Households' preferences can give rise to an overshooting of the exchange rate. |
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Keywords: | Preference shock financial markets catching-up with the Joneses exchange rate overshooting |
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