A Behavioral Macroeconomic Model of Exchange Rate Fluctuations with Complex Market Expectations Formation

Peter Flaschel, Florian Hartmann, Christopher Malikane and Christian Proaño

No 98, IEER Working Papers from Institute of Empirical Economic Research, Osnabrueck University

Abstract: The paper investigates the emergence of complex market expectations (opinion dynamics) around nominal exchange rate adjustments using a macro-financial model of a small open economy featuring heterogeneous expectation formation (chartists and fundamentalists) and gradual adjustment processes in real and also to a certain degree in financial markets. The model shows among other things the mechanisms through which the first type of agents tends to destabilise the economy. Global stability can be ensured if opinions turn to fundamentalist behaviour far off the steady state. This interaction of expectations and population dynamics is bounding the – due to chartist behavior – potentially explosive real-financial market interactions, but can enforce irregular behavior within these bounds. The size of output and exchange rate fluctuations can be dampened by adding suitable policy measures to the dynamics of the private sector.

Keywords: Nonlinear Exchange Rate Dynamics; Opinion Dynamics; Viability; Persistent and Irregular Fluctuations; Macroeconomic Policy (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 E52 (search for similar items in EconPapers)
Pages: 26
Date: 2014-01-29, Revised 2014-01-29
New Economics Papers: this item is included in nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: A Behavioral Macroeconomic Model of Exchange Rate Fluctuations with Complex Market Expectations Formation (2015)
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