Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 163: Exchange Rate Puzzles: A Tale of Switching Attractors

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: 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

JEL-codes: F31; F41

42 pages, May 1, 2004

Full text files 

WP_163.pdf PDF-file

Download statistics

Published as
Paul De Grauwe and Marianna Grimaldi, (2006), 'Exchange Rate Puzzles: A Tale of Switching Attractors', European Economic Review, vol 50, no 1, pages 1-33

Questions (including download problems) about the papers in this series should be directed to Lena Löfgren ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:rbnkwp:0163This page generated on 2024-09-13 22:16:57.