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Exchange Rates in Search of Fundamental Variables

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  • De Grauwe, Paul

Abstract

In this paper it is shown that relatively simple models are capable of generating exchange rate movements that, at least in the short run, are largely disconnected from their fundamental values. The essential ingredient of such models is the hypothesis that economic agents use different information sets. It is assumed that there are two classes of agents, fundamentalists and chartists. The former use the information contained in the model and a forecast of future fundamental variables. The latter forecast the future exchange rate based on past exchange rate movements. The interaction of these two classes of agents creates a non-linearity in the model and is responsible for the complex behaviour of the exchange rate.

Suggested Citation

  • De Grauwe, Paul, 1994. "Exchange Rates in Search of Fundamental Variables," CEPR Discussion Papers 1073, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1073
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    Citations

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    Cited by:

    1. Ahrens, Ralf & Reitz, Stefan, 2003. "Heterogeneous Expectations in the Foreign Exchange Market Evidence from the Daily Dollar/DM Exchange Rate," CFS Working Paper Series 2003/11, Center for Financial Studies (CFS).
    2. Ndung'u, N.S., 1999. "Monetary and Exchange Rate Policy in Kenya," Papers 94, African Economic Research Consortium.
    3. Stefan Reitz, 2005. "Central Bank Intervention and Heterogeneous Exchange Rate Expectations: Evidence from the Daily DEM/US-Dollar Exchange Rate," Open Economies Review, Springer, vol. 16(1), pages 33-50, January.
    4. Ralf Ahrens & Stefan Reitz, 2000. "Chartist Prediction in the Foreign Exchange Market. Evidence from the Daily Dollar/DM Exchange Rate," Econometric Society World Congress 2000 Contributed Papers 1683, Econometric Society.
    5. Kisu Simwaka, 2004. "A look at exchange rate and monetary policy in Malawi," Macroeconomics 0407017, University Library of Munich, Germany.
    6. Paul De Grauwe & Isabel Vansteenkiste, 2014. "Exchange Rates and Fundamentals: A Non-Linear Relationship?," World Scientific Book Chapters, in: Exchange Rates and Global Financial Policies, chapter 5, pages 159-187, World Scientific Publishing Co. Pte. Ltd..
    7. repec:dau:papers:123456789/10086 is not listed on IDEAS
    8. John Murray & Simon van Norden & Robert Vigfusson, 1996. "Excess Volatility and Speculative Bubbles in the Canadian Dollar: Real of Imagined?," Technical Reports 76, Bank of Canada.

    More about this item

    Keywords

    Exchange Markets; Exchange Rates;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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