Exchange Rate Puzzles: A Tale of Switching Attractors

Paul De Grauwe and Marianna Grimaldi ()
Additional contact information
Marianna Grimaldi: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 163, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: The rational expectations efficient market model of the exchange rate has failed empirically. In this paper we develop a model of the exchange rate in which agents use simple forecasting rules. Based on an ex post evaluation of the relative profitability of these rules they decide whether to switch or not. In addition, transactions costs in the goods market are introduced. We show that this simple model creates great complexity in the market which is characterised by the fact that the exchange rate is disconnected from its fundamental most of the time. Finally we show that this model mimicks most of the empirical puzzles uncovered in the literature.

Keywords: Exchange rate; Heterogeneous agents; Technical trading; Transaction costs (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2004-05-01
New Economics Papers: this item is included in nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in European Economic Review, 2006, pages 1-33.

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http://www.riksbank.se/upload/WorkingPapers/WP_163.pdf (application/pdf)

Related works:
Chapter: Exchange Rate Puzzles: A Tale of Switching Attractors (2014)
Journal Article: Exchange rate puzzles: A tale of switching attractors (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0163

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