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Exchange rate determination, macroeconomic dynamics and stability under heterogeneous behavioral FX expectations

  • Proaño, Christian R.

Abstract In this paper the role of behavioral forecasting rules of chartist and fundamentalist type for the dynamic macroeconomic stability of a two-country system is investigated. 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 also the entire macroeconomic system is destabilized. This outcome takes place despite of a monetary policy conduction in both countries which satisfies the Taylor Principle, and thus highlights the limits of monetary policy as a macroeconomic stabilization instrument in a world of boundedly rational agents.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 77 (2011)
Issue (Month): 2 (February)
Pages: 177-188

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Handle: RePEc:eee:jeborg:v:77:y:2011:i:2:p:177-188
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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