Currency Market Participants' Mental Model and the Collapse of the Dollar: 2001-2008
AbstractIt is well accepted among Institutionalist and Post Keynesian scholars that portfolio investment markets are driven by agents' expectations rather than "the fundamentals." This explains, it is argued, why asset and currency prices are so much more volatile than and often clearly out of line with what we would otherwise consider to be their underlying determinants. What is rarely addressed, however, is how those expectations are formed. This paper fills the void by proposing a specific view of agents' expectations based on the mental model they employ to understand currency movements. The paper derives this schematic by examining market participants' psychological propensities and the world view of the subculture of which they are members. It will be shown that the model is consistent with the salient features of the foreign exchange market and it is employed to explain the dollar's fall from 2001 through 2008.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by M.E. Sharpe, Inc. in its journal Journal of Economic Issues.
Volume (Year): 43 (2009)
Issue (Month): 4 (December)
Contact details of provider:
Web page: http://www.mesharpe.com/mall/results1.asp?acr=jei
mental model; psychology; exchange rates; foreign currency;
Other versions of this item:
- John Harvey, 2009. "Currency Market Participants' Mental Model and the Collapse of the Dollar: 2001-2008," Working Papers 200901, Texas Christian University, Department of Economics.
- F31 - International Economics - - International Finance - - - Foreign Exchange
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-91, September.
- John Harvey, 2001.
"The Determinants of Currency Market Forecasts: An Empirical Study,"
200102, Texas Christian University, Department of Economics.
- John T. Harvey, 2002. "The determinants of currency market forecasts: an empirical study," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 25(1), pages 33-49, January.
- Imad A. Moosa, 2004. "An empirical examination of the Post Keynesian view of forward exchange rates," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 26(3), pages 395-418, April.
- John Harvey, 2003.
"Deviations from Uncovered Interest Rate Parity: A Post Keynesian Explanation,"
200301, Texas Christian University, Department of Economics.
- John T. Harvey, 2004. "Deviations from uncovered interest rate parity: a Post Keynesian explanation," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 27(1), pages 19-35, October.
- Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
- John T. Harvey, 1993. "Daily Exchange Rate Variance," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 15(4), pages 515-540, July.
- Hiroya Akiba, 2004. "Expectations, stability, and exchange rate dynamics under the Post Keynesian hypothesis," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 27(1), pages 125-140, October.
- Cheung, Yin-Wong & Chinn, Menzie David & Marsh, Ian W, 1999.
"How Do UK-Based Foreign Exchange Dealers Think Their Market Operates?,"
CEPR Discussion Papers
2230, C.E.P.R. Discussion Papers.
- Yin-Wong Cheung & Menzie D. Chinn & Ian W. Marsh, 2004. "How do UK-based foreign exchange dealers think their market operates?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 289-306.
- Yin-Wong Cheung & Menzie D. Chinn & Ian W. Marsh, 2000. "How Do UK-Based Foreign Exchange Dealers Think Their Market Operates?," NBER Working Papers 7524, National Bureau of Economic Research, Inc.
- Ian Marsh & Menzie Chinn & Yin-Wong Cheung, 1999. "How do UK-Based Foreign Exchange Dealers Think Their Market Operates?," Working Papers wp99-21, Warwick Business School, Finance Group.
- Imad A. Moosa, 2007. "Neoclassical versus Post Keynesian models of exchange rate determination: a comparison based on nonnested model selection tests and predictive accuracy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 30(2), pages 169-185, December.
- John Harvey, 2001. "Psychological and Institutional Forces and the Determination of Exchange Rates," Working Papers 200101, Texas Christian University, Department of Economics.
- Imad A. Moosa, 2002. "A Test of the Post Keynesian Hypothesis on Expectation Formation in the Foreign Exchange Market," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 24(3), pages 443-457, April.
- Stephan Schulmeister, 1988.
"Currency speculation and dollar fluctuations,"
BNL Quarterly Review,
Banca Nazionale del Lavoro, vol. 41(167), pages 343-365.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ian Winship) or (Chris Nguyen).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.