The Exchange Rate in a Model with Heterogeneous Agents and Transactions Costs

48 Pages Posted: 11 Nov 2002

See all articles by Paul De Grauwe

Paul De Grauwe

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank

Date Written: October 2002

Abstract

In this paper we develop a model of the exchange rate. The existence of transactions costs introduces an important non-linearity. Agents have different beliefs about the future exchange rate. We show that this simple model creates great complexity in the market which is characterised by the fact that the exchange rate is disconnected from its fundamental most of the time. Periods of tranquility and turbulence alternate in unpredictable manner. Finally we show that this model mimicks most of the empirical puzzles uncovered in the literature.

JEL Classification: F31, F41

Suggested Citation

De Grauwe, Paul and De Grauwe, Paul and Grimaldi, Marianna, The Exchange Rate in a Model with Heterogeneous Agents and Transactions Costs (October 2002). Available at SSRN: https://ssrn.com/abstract=348420 or http://dx.doi.org/10.2139/ssrn.348420

Paul De Grauwe (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank ( email )

S-103 37 Stockholm
Sweden

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