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Noise Trading, Short-run Exchange Rate Dynamics and Economic Co-fluctuations
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TitleNoise Trading, Short-run Exchange Rate Dynamics and Economic Co-fluctuations  
AuthorBian Xuezi and Fan Aijun  
OrganizationEconomic School of Shandong University, 
Key Words NOEM;Pricing-to-Market;Noise Trading;Delayed Overshooting 
AbstractBy constructing a two-country model employing both features of market segmentation and noise trading in foreign exchange market, we empirically evaluate parameters using data of China and U.S., and draw a comparison of model fit under different capital market structures. The paper reveals an introduction of UIP shock and noise trading improves overall fitness significantly. Dynamic analysis of the two-country model proves delayed overshooting a robust character of exchange rate in short run. Tightened monetary policy would result in a persistent appreciation of domestic currency and improvement of the recent trade imbalance between two countries indeed, also it would cause noticeable decline in U.S. consumption and sharper decrease in utility level. Besides, although the re-industrialization policy benefits U.S. output and consumption, it would cause a further aggravation of trade imbalance. Optimal monetary policy simulation finds that monetary policy adjustment of China relates to nominal exchange rate but the response coefficient was larger compared with the optimal value, which indicates that central bank ought to reduce their attention to exchange rate fluctuations in adjusting benchmark interest rate. Finally, we summarize two suggestions for further research. 
Serial NumberWP1030 
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