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Bubbling and Crashing Exchange Rates

Listed author(s):
  • Marianna Grimaldi
  • Paul De Grauwe

We develop a simple model of the foreign exchange market in which agents optimize their portfolio and use different forecasting rules. They check the profitability of these rules ex post and select the more profitable one.This model produces two kinds of equilibria, a fundamental and a bubble one. In a stochastic environment the model generates a complex dynamics in which bubbles and crashes occur at unpredictable moments. We also analyse the empirical relevance of the model.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2003/wp-cesifo-2003-09/cesifo1_wp1045.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1045.

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Date of creation: 2003
Handle: RePEc:ces:ceswps:_1045
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