The complex interplay between exchange rate and real markets: An agent-based model exploration

Domenico Delli Gatti, Tommaso Ferraresi, Filippo Gusella, Lilit Popoyan, Giorgio Ricchiuti and Andrea Roventini

Journal of Economic Behavior & Organization, 2025, vol. 238, issue C

Abstract: We extend the multi-country, multi-sector agent-based model of Dosi et al. (2019); Dosi et al. (2021) by integrating a currency market populated by heterogeneous financial agents—chartists and fundamentalists—who form expectations and trade foreign exchange based on boundedly rational heuristics. This addition generates complex real-financial interactions, wherein the exchange rate acts both as a channel of transmission for endogenous macroeconomic fluctuations and as an independent source of financial shocks. Through extensive simulations, the model reproduces salient empirical regularities of exchange rate behavior—such as excess volatility, fat-tailed return distributions, volatility clustering, and cross-country contagion—and sheds light on the amplification mechanisms linking financial speculation to real economic instability. Finally, we evaluate the effectiveness of central bank interventions under different policy rules and market configurations, highlighting their conditional capacity to stabilize macroeconomic dynamics in the presence of adaptive agent behavior.

Keywords: Agent-based model; Exchange rate dynamics; Financial crises; Endogenous business cycles; Heterogeneous traders; Central bank interventions (search for similar items in EconPapers)
JEL-codes: E3 F41 O4 O41 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268125003713
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:238:y:2025:i:c:s0167268125003713

DOI: 10.1016/j.jebo.2025.107252

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().