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Technical trading and the Volatility of Exchange Rates

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Author Info
Christian Bauer ()
Bernhard Herz ()

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Abstract

The microeconomic structure of foreign exchange markets can cause excessive volatility in flexible exchange rate regimes. The market entry of chartists changes the composition of the foreign exchange market and leads to excessive volatility. Our chartist model predicts a continuum of equilibria and an U-shaped relation between exchange rate volatility and the measured trend, which is supported by the empirical evidence. The data show a positive nonlinear relation between trend and volatility, as predicted by the model. In such a situation monetary policy may be able to smooth the exchange rate without changing macroeconomic fundamentals.

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Paper provided by Department of Economics, Economics I, Bayreuth University in its series Macroeconomics with number techtrade_2003-03.

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Handle: RePEc:uba:hadfwe:techtrade_2003-03

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Related research
Keywords: multiple equilibria monetary policy fundamentals risk

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  1. Bernhard Herz & Christian Bauer, . "Technical trading, monetary policy, and exchange rate regimes," Macroeconomics techtrademonpol_2003-07, Department of Economics, Economics I, Bayreuth University. [Downloadable!]
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