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Some implications of behavioral finance for international monetary analysis

Author

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  • Willett Thomas D.

    (Claremont McKenna College and Claremont Graduate University Director. Claremont Institute for Economic Policy Studies, 50 E. 10th Street, Claremont, CA 91711, U.S.A .)

Abstract

This paper discusses some of the important insights from behavioral finance for international monetary and financial analysis. A broad approach to behavioral finance is advocated which includes analysis of the effects of uncertainty, perverse incentives, and complexity economics as well as the cognitive biases focused on in the initial contributions to behavioral finance. It offers reasons why capital mobility is often not perfect and expectations are sometimes not rational. Correctly interpreted it is not a wholesale attack on efficient market theory but rather argues that markets can behave differently at different times, being efficient sometimes and subject to destabilize or insufficiently stabilizing speculation at others and focuses on the conditions that make different types of behavior more likely. It helps provide insights into issues such as currency crisis, the effects of official intervention in foreign exchange markets, the international monetary trilemma, capital flow surges and reversals, the discipline effects of fixed exchange rates and international financial markets and why uncovered interest rate parity often does not hold.

Suggested Citation

  • Willett Thomas D., 2024. "Some implications of behavioral finance for international monetary analysis," Economics and Business Review, Sciendo, vol. 10(1), pages 7-29, April.
    • Handle: RePEc:vrs:ecobur:v:10:y:2024:i:1:p:7-29:n:6
    DOI: 10.18559/ebr.2024.1.1193
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    More about this item

    Keywords

    behavioral finance; capital flows; efficient markets; international monetary analysis; open-economy macroeconomics;
    All these keywords.

    JEL classification:

    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • F3 - International Economics - - International Finance
    • G4 - Financial Economics - - Behavioral Finance

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