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Heterogeneity of agents, transactions costs and the exchange rate

de Grauwe, Paul and Grimaldi, Marianna (2005) Heterogeneity of agents, transactions costs and the exchange rate. Journal of Economic Dynamics and Control, 29 (4). pp. 691-719. ISSN 0165-1889

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Identification Number: 10.1016/j.jedc.2004.01.004


We develop a model of the exchangerate that has two features. First, there are non-linearities that arise from the existence of transactioncosts in goods markets. Second, the model assumes heterogeneous agents who use simple forecasting rules, the ‘fitness’ of which is then controlled ex post by checking their profitability, and by switching to the more profitable rules. This model is capable of reproducing the empirical puzzles observed in exchange markets (disconnect puzzle, excess volatility, fat tails, volatility clustering). We analyse some policy implications of this type of modelling of the exchangerate.

Item Type: Article
Official URL:
Additional Information: © 2005 Elsevier
Divisions: European Institute
Subjects: H Social Sciences > HG Finance
JEL classification: F - International Economics > F3 - International Finance > F31 - Foreign Exchange
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Date Deposited: 05 Oct 2012 10:46
Last Modified: 20 Jun 2021 01:35

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