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.
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Bibliographic InfoPaper provided by Texas Christian University, Department of Economics in its series Working Papers with number 200901.
Length: 32 pages
Date of creation: Feb 2009
Date of revision:
Publication status: Published in Journal of Economic Issues, December 2009, pages 931-49
exchange rates; pyschology; institutionalist;
Other versions of this item:
- John T. Harvey, 2009. "Currency Market Participants' Mental Model and the Collapse of the Dollar: 2001-2008," Journal of Economic Issues, M.E. Sharpe, Inc., vol. 43(4), pages 931-949, December.
- F31 - International Economics - - International Finance - - - Foreign Exchange
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