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Imperfect Knowledge and Behaviour in the Foreign Exchange Market

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Author Info
Goldberg, Michael D
Frydman, Roman
Abstract

This paper explores the consequences of imperfect knowledge for exchange rate dynamics within the monetary class of models. The authors' framework, which they call the theories consistent expectations framework, provides a particular formalization of a world in which agents use theories in order to look forward but in which these theories provide only qualitative knowledge rather than quantitative knowledge about the economy. The authors find that, as long as agents possess at least some degree of imperfect knowledge, the monetary models of the exchange rate generate dynamics consistent with the behavior observed in the literature. Copyright 1996 by Royal Economic Society.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 106 (1996)
Issue (Month): 437 (July)
Pages: 869-93
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Handle: RePEc:ecj:econjl:v:106:y:1996:i:437:p:869-93

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  1. Nelson C. Mark & Yangru Wu, 1996. "Risk, Policy Rules, and Noise: Rethinking Deviations From Uncovered Interest Parity," Working Papers 014, Ohio State University, Department of Economics. [Downloadable!]
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  2. Joscha Beckmann & Ansgar Belke & Michael Kühl, 2009. "How Stable Are Monetary Models of the Dollar-Euro Exchange Rate? - A Time-varying Coefficient Approach," Ruhr Economic Papers 0134, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
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  3. Richard H. Cohen & Carl Bonham, 2007. "Specifying the Forecast Generating Process for Exchange Rate Survey Forecasts," Working Papers 200718, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
  4. Nelson Mark & Yangru Wu, 1998. "Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise," Working Papers 98-05, Ohio State University, Department of Economics. [Downloadable!]
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  5. Fanelli, Luca, 2008. "Evaluating the New Keynesian Phillips Curve under VAR-Based Learning," Economics Discussion Papers 2008-15, Kiel Institute for the World Economy. [Downloadable!]
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  6. Iancu, Aurel, 2009. "Real Economic Convergence," Working Papers of National Institute of Economic Research 090104, National Institute of Economic Research. [Downloadable!]
  7. Carl Bonham & Richard Cohen & Shigeyuki Abe, 2006. "The Rationality and Heterogeneity of Survey Forecasts of the Yen-Dollar Exchange Rate: A Reexamination," Working Papers 200611, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
  8. Fanelli, Luca, 2008. "Evaluating New Keynesian Phillips Curve under VAR-Based Learning," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(33), pages 1-24. [Downloadable!]
  9. W A Razzak & Thomas Grennes, 1998. "The long-run nominal exchange rate: specification and estimation issues," Reserve Bank of New Zealand Discussion Paper Series G98/5, Reserve Bank of New Zealand. [Downloadable!]
  10. Iancu, Aurel, 2009. "Nominal Convergence," Working Papers of National Institute of Economic Research 090602, National Institute of Economic Research. [Downloadable!]
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