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The Exchange Rate in a Model with Heterogeneous Agents and Transactions Costs

  • Paul De Grauwe
  • Marianna Grimaldi
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    In this paper we develop a model of the exchange rate. The existence of transactions costs introduces an important non-linearity. Agents have different beliefs about the future exchange rate. We show that this simple model creates great complexity in the market which is characterised by the fact that the exchange rate is disconnected from its fundamental most of the time. Periods of tranquility and turbulence alternate in unpredictable manner. Finally we show that this model mimicks most of the empirical puzzles uncovered in the literature.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2002/wp-cesifo-2002-10/cesifo_wp792.pdf
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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 792.

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    Date of creation: 2002
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    Handle: RePEc:ces:ceswps:_792
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    1. Shang-Jin Wei & Jungshik Kim, 1999. "The Big Players in the Foreign Exchange Market: Do They Trade on Information or Noise?," CID Working Papers 5, Center for International Development at Harvard University.
    2. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
    3. Mordecai Kurz & Maurizio Motolese, . "Endogenous Uncertainty and Market Volatility," Working Papers 99005, Stanford University, Department of Economics.
    4. Cheung, Yin-Wong & Lai, Kon S., 2000. "On the purchasing power parity puzzle," Journal of International Economics, Elsevier, vol. 52(2), pages 321-330, December.
    5. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
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