The Exchange Rate and its Fundamentals. A Chaotic Perspective
41 Pages Posted: 31 Jan 2002
Date Written: January 2002
Abstract
We analyse the workings of a simple non-linear exchange rate model in which agents hold different beliefs about the underlying model. We distinguish between "chartists" and "fundamentalists". The non-linearities in the model originate from transactions costs and from the existence of non-linear adjustment dynamics in the goods market. We find, first, that the simple non-linear structure of the model is capable of generating a very complex exchange rate dynamics. Second, our model is capable of explaining some empirical puzzles concerning exchange rate behaviour, i.e. the "disconnect" puzzle which says that the exchange rate is disconnected form its underlying fundamentals most of the time and the excess volatility puzzle.
JEL Classification: F31, F37
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
"Price Barriers" and the Dynamics of Asset Prices in Equilibrium
By Pierluigi Balduzzi, Silverio Foresi, ...
-
By Bernhard Herz and Christian Bauer
-
Technical Trading, Monetary Policy, and Exchange Rate Regimes
By Bernhard Herz and Christian Bauer
-
Exchange Rate Dynamics in a Target Zone - A Heterogeneous Expectations Approach
By Christian Bauer, Paul De Grauwe, ...
-
Technical Trading and the Volatility of Exchange Rates
By Bernhard Herz and Christian Bauer
-
A Better Asymmetric Model of Changing Volatility in Stock Returns: Trend-GARCH
-
Ability of the New EU Member States to Fulfill the Exchange Rate Stability Convergence Criterion
-
The Credibility of CIS Exchange Rate Policies: A Technical Trader's View
By Bernhard Herz and Christian Bauer