The interplay between real and exchange rate market: an agent-based model approach

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

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: We present a multi-country, multi-sector agent-based model that extends Dosi et al. (2019) and incorporates the exchange market and its interaction with the real economy. The exchange rate is influenced not only by trade flows but also by the heterogeneous demand for foreign currencies from financial traders. In this respect, the dual nature of the exchange rate is highlighted, acting both as a transmission channel of endogenous shocks and as a source of shocks. Indeed, differing beliefs bring about real-financial non-linear patterns with feedback mechanisms. Simulations show that the introduction of speculative sentiment behaviour reflects important stylised facts of bilateral exchange rate series. Furthermore, the findings indicate that trend-following behaviour substantially increases financial turbulence and contributes to real economic fluctuations. Finally, we highlight the power and limitations of the central bank as an actor in the exchange rate market, showing that while the central bank's interventions can effectively curb boom-bust cycles, their outcomes differ substantially.

Keywords: agent-based model; exchange rate dynamics; endogenous cycles; heterogeneous traders; central bank interventions. (search for similar items in EconPapers)
JEL-codes: E3 F41 O4 O41 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2024
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cmp, nep-hme, nep-ifn, nep-mon, nep-opm and nep-pke
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