A dynamic exchange rate model with heterogeneous agents

Michele Gori and Giorgio Ricchiuti

Journal of Evolutionary Economics, 2018, vol. 28, issue 2, No 10, 399-415

Abstract: Abstract In this paper, we analyze a heterogeneous agent model in which the fundamental exchange rate is endogenously determined by the real markets. The exchange rate market and the real markets are linked through the balance of payments. We have analytically found that there exists at least a steady state in which the exchange rate is equal to its fundamental value and incomes of both countries are equal to the autonomous components times the multiplier (as in the Income-Expenditure model). This steady state can be unique and unstable when all agents act as contrarians, while when agents act as fundamentalists it is unique but its stability depends on the reactivity of actors of the market. Finally, we show that the (in)stability of the economic system depends on both the reactivity of the markets and that of different types of agents involved. Employing well-know functional forms, we show that the model can replicate some of the statistical features of the true time series of the exchange rate.

Keywords: Complex dynamics; Heterogeneous agents models; Financial markets (search for similar items in EconPapers)
JEL-codes: C62 D84 E12 E32 G02 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (6)

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Working Paper: A Dynamic Exchange Rate Model with Heterogeneous Agents (2014)
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DOI: 10.1007/s00191-017-0513-9

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