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A chaotic model of the exchange rate: The role of fundamentalists and chartists

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  • Paul Grauwe
  • Hans Dewachter

Abstract

A monetary model of the exchange rate is constructed in which “fundamentalists†and “chartists†interact. It is shown that the non-linearity of this speculative dynamics leads to chaotic motion of the exchange rate. The model is also capable of generating some of the stylized facts of exchange rate dynamics. Copyright Kluwer Academic Publishers 1993

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File URL: http://hdl.handle.net/10.1007/BF01011136
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 4 (1993)
Issue (Month): 4 (December)
Pages: 351-379

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Handle: RePEc:kap:openec:v:4:y:1993:i:4:p:351-379

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: exchange rate; chaos; fundamentalism; chartism;

References

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  1. Scheinkman, Jose A & LeBaron, Blake, 1989. "Nonlinear Dynamics and Stock Returns," The Journal of Business, University of Chicago Press, vol. 62(3), pages 311-37, July.
  2. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  3. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  4. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  5. Jeffrey A. Frankel & Kenneth A. Froot, 1986. "The Dollar as an Irrational Speculative Bubble: A Tale of Fundamentalisists," NBER Working Papers 1854, National Bureau of Economic Research, Inc.
  6. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
  7. De Grauwe, Paul, 1989. "On the Nature of Risk in the Foreign Exchange Markets: Evidence from the Dollar and the EMS Markets," CEPR Discussion Papers 352, C.E.P.R. Discussion Papers.
  8. Baumol, William J & Benhabib, Jess, 1989. "Chaos: Significance, Mechanism, and Economic Applications," Journal of Economic Perspectives, American Economic Association, vol. 3(1), pages 77-105, Winter.
  9. Baillie,Richard T. & McMahon,Patrick C., 1990. "The Foreign Exchange Market," Cambridge Books, Cambridge University Press, number 9780521396905, April.
  10. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-47, August.
  11. Taylor, Mark P, 1989. "Charts, Noise and Fundamentals: A Study of the London Foreign Exchange Market," CEPR Discussion Papers 341, C.E.P.R. Discussion Papers.
  12. Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics," Working papers 544, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
  14. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  15. Stephan Schulmeister, 1988. "Currency speculation and dollar fluctuations," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 41(167), pages 343-365.
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