Exchange rate determination, macroeconomic dynamics and stability under heterogeneous behavioral FX expectations

Christian Proaño

Journal of Economic Behavior & Organization, 2011, vol. 77, issue 2, 177-188

Abstract: Abstract In this paper the role of behavioral forecasting rules of chartist and fundamentalist type for the dynamic macroeconomic stability of a two-country system is investigated. The main result of the paper is that for large trend-chasing parameters in the chartist rule used in the FX market, not only this market but also the entire macroeconomic system is destabilized. This outcome takes place despite of a monetary policy conduction in both countries which satisfies the Taylor Principle, and thus highlights the limits of monetary policy as a macroeconomic stabilization instrument in a world of boundedly rational agents.

Keywords: (D)AS-AD; Monetary; policy; Behavioral; heterogenous; expectations; FX; market; dynamics (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:77:y:2011:i:2:p:177-188

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