The Exchange Rate and its Fundamentals in a Complex World

27 Pages Posted: 22 Jul 2005

See all articles by Paul De Grauwe

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)

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank

Abstract

We develop a nonlinear exchange rate model with heterogeneous agents. Some agents adopt a "fundamentalist" forecasting rule, while others use a "chartist" forecasting rule. We show that the model is capable of explaining the empirical puzzles relating to exchange rate movements. In particular, the model explains the "exchange rate determination" and PPP puzzles, the excess volatility, and fat tails in exchange rate returns.

Suggested Citation

De Grauwe, Paul and Grimaldi, Marianna, The Exchange Rate and its Fundamentals in a Complex World. Review of International Economics, Vol. 13, No. 3, pp. 549-575, August 2005. Available at SSRN: https://ssrn.com/abstract=758626

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

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank ( email )

S-103 37 Stockholm
Sweden

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