Households' Preferences and Exchange Rate Overshooting

Author: Pierdzioch, Christian

Source: International Economic Journal, Volume 21, Number 2, June 2007 , pp. 297-316(20)

Publisher: Routledge, part of the Taylor & Francis Group

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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.

Keywords: Preference shock; financial markets; catching-up with the Joneses; exchange rate overshooting

Document Type: Research article

DOI: http://dx.doi.org/10.1080/10168730701345356

Affiliations: 1: Saarland University, Saarbruecken, Germany

Publication date: 2007-06-01