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Fundamental and Non-Fundamental Equilibria in the Foreign Exchange Market. A Behavioural Finance Framework

  • Paul de Grauwe
  • Roberto Dieci
  • Marianna Grimaldi
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    We develop a simple model of the exchange rate 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 contrast these ”behavioural” bubbles with ”rational” bubbles.

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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1431.

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    Date of creation: 2005
    Date of revision:
    Handle: RePEc:ces:ceswps:_1431
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