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The Exchange Rate and its Fundamentals in a Complex World

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  • Paul De Grauwe
  • Marianna Grimaldi

Abstract

We develop a nonlinear exchange rate model with heterogeneous agents. Some agents adopt a “fundamentalist” forecasting rule, while others use a “chartist” forecasting rule. We show that the model is capable of explaining the empirical puzzles relating to exchange rate movements. In particular, the model explains the “exchange rate determination” and PPP puzzles, the excess volatility, and fat tails in exchange rate returns.

Suggested Citation

  • Paul De Grauwe & Marianna Grimaldi, 2005. "The Exchange Rate and its Fundamentals in a Complex World," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 549-575, August.
    • Handle: RePEc:bla:reviec:v:13:y:2005:i:3:p:549-575
    DOI: 10.1111/j.1467-9396.2005.00523.x
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