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Animal spirits in the foreign exchange market

de Grauwe, Paul and Rovira Kaltwasser, Pablo (2012) Animal spirits in the foreign exchange market. Journal of Economic Dynamics and Control, 36 (8). pp. 1176-1192. ISSN 0165-1889

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Abstract

It is traditionally assumed in finance models that the fundamental value of an asset is known with certainty. In this paper we depart from that assumption. We propose a simple model of the exchange rate in which agents have biased and unbiased beliefs about the fundamental rate. We show that such a model produces waves of optimism and pessimism unrelated to the underlying fundamental value. In addition, the model shows that in a world characterized by the existence of heterogeneous beliefs about the fundamental, exchange rate movements can be remarkably complex even if only fundamentalist traders operate in the market.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-econom...
Additional Information: © 2012 Elsevier B.V.
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C62 - Existence and Stability Conditions of Equilibrium
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief
E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E10 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
Sets: Departments > European Institute
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 11 Dec 2012 13:02
URL: http://eprints.lse.ac.uk/45162/

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