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Exchange rate puzzles: a tale of switching attractors

de Grauwe, Paul and Grimaldi, Marianna (2006) Exchange rate puzzles: a tale of switching attractors. European Economic Review, 50 (1). pp. 1-33. ISSN 0014-2921

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Identification Number: 10.1016/j.euroecorev.2004.07.005


The rational expectations efficient market model of the exchangerate has failed empirically. In this paper, we develop a model of the exchangerate 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 exchangerate 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.

Item Type: Article
Official URL:
Additional Information: © 2006 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 11:12
Last Modified: 02 Apr 2024 18:57

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