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Heterogenous Behavioral Expectations, FX Fluctuations and Dynamic Stability in a Stylized Two-Country Macroeconomic Model

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  • Christian R. Proano

    ()
    (IMK at the Hans Boeckler Foundation)

Abstract

In this paper the role of behavioral forecasting rules of chartist and fun-damentalist type for the dynamic macroeconomic stability of a two-country system is investigated both analytically and numerically. The main result of the paper is that for large trend-chasing parameters in the chartist rule used in the FX market, not only this market but the entire macroeconomic system is destabilized. This takes place despite of the presence of monetary policy rules in both countries which satisfy the Taylor Principle.

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Bibliographic Info

Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 03-2009.

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Length: 29 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:imk:wpaper:3-2009

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Keywords: (D)AS-AD; monetary policy; behavioral heterogenous expectations; FX market dynamics.;

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