de Grauwe, Paul 
ORCID: 0000-0001-5225-1301 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
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. |
| Divisions: | European Institute |
| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
| JEL classification: | 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 |
| Date Deposited: | 11 Dec 2012 13:02 |
| Last Modified: | 12 Dec 2024 00:10 |
| URI: | http://eprints.lse.ac.uk/id/eprint/45162 |
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