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Chaos and the exchange rate

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Author Info
Daniela Federici
Giancarlo Gandolfo

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Abstract

Chaotic exchange rate models are structural models built in discrete time (difference equations), and show that with orthodox assumptions (PPP, interest parity, etc) and introducing plausible nonlinearities in the dynamic equations, it is possible to obtain a model capable of giving rise to chaotic motion. However, none of these models is estimated, and the conclusions are based on simulations: the empirical validity of these models is not tested. In this paper, a continuous time (the exchange rate is obviously a continuous variable) exchange rate model is built as a non-linear set of three differential equations and its theoretical properties (steady state, stability, etc,) analysed. The model is then econometrically estimated in continuous time with Italian data and examined for the possible presence of chaotic motion. This paper also shows that the continuous time estimation of economic models built as systems of nonlinear differential equations is a very powerful tool in the hands of the profession.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Journal of International Trade & Economic Development.

Volume (Year): 11 (2002)
Issue (Month): 2 (June)
Pages: 111-142
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Handle: RePEc:taf:jitecd:v:11:y:2002:i:2:p:111-142

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Related research
Keywords: Chaos; Exchange Rate; Continuous Time Econometrics;

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References listed on IDEAS
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.:
  1. Brooks, Chris, 1998. "Chaos in Foreign Exchange Markets: A Sceptical View," Computational Economics, Springer, vol. 11(3), pages 265-81, June. [Downloadable!]
  2. Gandolfo, Giancarlo & Padoan, Pietro Carlo & Paladino, Giovanna, 1990. "Exchange rate determination: Single-equation or economy-wide models? : A test against the random walk," Journal of Banking & Finance, Elsevier, vol. 14(5), pages 965-992, November. [Downloadable!] (restricted)
  3. Da Silva, S., 1999. "Exchange Rate Dynamics Redux and Chaos," Discussion Papers 99-08, Department of Economics, University of Birmingham.
  4. De Grauwe, Paul & Dewachter, Hans, 1990. "A Chaotic Monetary Model of the Exchange Rate," CEPR Discussion Papers 466, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. Paul Grauwe & Hans Dewachter, 1993. "A chaotic model of the exchange rate: The role of fundamentalists and chartists," Open Economies Review, Springer, vol. 4(4), pages 351-379, December. [Downloadable!] (restricted)
  7. Heiner, Ronald A., 1989. "The origin of predictable dynamic behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 233-257, October. [Downloadable!] (restricted)
  8. Szpiro, George G., 1994. "Exchange rate speculation and chaos inducing intervention," Journal of Economic Behavior & Organization, Elsevier, vol. 24(3), pages 363-368, August. [Downloadable!] (restricted)
  9. Bajo-Rubio, Oscar & Fernandez-Rodriguez, Fernando & Sosvilla-Rivero, Simon, 1992. "Chaotic behaviour in exchange-rate series : First results for the Peseta--U.S. dollar case," Economics Letters, Elsevier, vol. 39(2), pages 207-211, June. [Downloadable!] (restricted)
  10. De Grauwe, Paul, 1990. "Deterministic Chaos in the Foreign Exchange Markets," CEPR Discussion Papers 370, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Richard Meese & Kenneth Rogoff, 1983. "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 67-112 National Bureau of Economic Research, Inc. [Downloadable!]
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  12. Scheinkman, Jose A & LeBaron, Blake, 1989. "Nonlinear Dynamics and Stock Returns," Journal of Business, University of Chicago Press, vol. 62(3), pages 311-37, July. [Downloadable!] (restricted)
  13. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March. [Downloadable!] (restricted)
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  1. repec:bep:sndecm:11:2007:1:1323-1323 is not listed on IDEAS
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