Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 164: Bubbles and Crashes in a Behavioural Finance Model
Paul De Grauwe () and Marianna Grimaldi ()
Additional contact information
Paul De Grauwe: University of Leuven, Postal: Faculty of Economics and Applied Economics, Naamsestraat 69, 3000 Leuven, Belgium
Marianna Grimaldi: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Abstract: We develop a simple model of the exchange rate in which agents optimize their portfolio and use different forecasting rules. They check the profitability of these rules ex post and select the more profitable one. This model produces two kinds of equilibria, a fundamental and a bubble one. In a stochastic environment the model generates a complex dynamics in which bubbles and crashes occur at unpredictable moments. We contrast these "behavioural" bubbles with "rational" bubbles.
Keywords: exchange rate; bounded rationality; heterogeneous agents; bubbles and crashes; complex dynamics
44 pages, May 1, 2004
Full text files
WP_164.pdf
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