The Exchange Rate and its Fundamentals in a Complex World

Paul De Grauwe and Marianna Grimaldi

Review of International Economics, 2005, vol. 13, issue 3, 549-575

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.

Date: 2005
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