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The Behavior of the Exchange Rate in the Genetic Algorithm and Experimental Economies

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  • Arifovic, Jasmina

Abstract

This paper studies the behavior of the exchange rate in the Kareken-Wallace overlapping generations economy with two currencies in which decision rules are updated using the genetic algorithm. The analysis shows that a stationary monetary equilibrium of the Kareken-Wallace model is not stable under the genetic algorithm dynamics. The fluctuations in the genetic algorithm exchange rate are driven by fluctuations in the portfolio fractions, which change over time in response to the inequality between the rates of return on two currencies. Further, both the genetic algorithm simulations and the experiments with human subjects were characterized by continuing fluctuations of the exchange rate. Copyright 1996 by University of Chicago Press.

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  • Arifovic, Jasmina, 1996. "The Behavior of the Exchange Rate in the Genetic Algorithm and Experimental Economies," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 510-541, June.
  • Handle: RePEc:ucp:jpolec:v:104:y:1996:i:3:p:510-41
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    1. King, Robert G. & Wallace, Neil & Weber, Warren E., 1992. "Nonfundamental uncertainty and exchange rates," Journal of International Economics, Elsevier, vol. 32(1-2), pages 83-108, February.
    2. Neil Wallace, 1979. "Why markets in foreign exchange are different from other markets," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    3. Marimon Ramon & Spear Stephen E. & Sunder Shyam, 1993. "Expectationally Driven Market Volatility: An Experimental Study," Journal of Economic Theory, Elsevier, vol. 61(1), pages 74-103, October.
    4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    5. Sargent, Thomas J., 1993. "Bounded Rationality in Macroeconomics: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288695.
    6. Manuelli, Rodolfo E & Peck, James, 1990. "Exchange Rate Volatility in an Equilibrium Asset Pricing Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 559-574, August.
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