Bubbling and Crashing Exchange Rates

44 Pages Posted: 10 Nov 2003

See all articles by Marianna Grimaldi

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank

Paul De Grauwe

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

Date Written: September 2003

Abstract

We develop a simple model of the foreign exchange market in which agents optimize their portfolio and use different forecasting rules. They check the profitability of these rules ex post and select the more profitable one. This model produces two kinds of equilibria, a fundamental and a bubble one. In a stochastic environment the model generates a complex dynamics in which bubbles and crashes occur at unpredictable moments. We also analyse the empirical relevance of the model.

JEL Classification: F31, F41

Suggested Citation

Grimaldi, Marianna and De Grauwe, Paul, Bubbling and Crashing Exchange Rates (September 2003). CESifo Working Paper Series No. 1045. Available at SSRN: https://ssrn.com/abstract=456200

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank ( email )

S-103 37 Stockholm
Sweden

Paul De Grauwe (Contact Author)

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

Houghton Street
London, WC2A 2AE
United Kingdom

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

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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