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A Dynamic Exchange Rate Model with Heterogeneous Agents

Author

Listed:
  • Michele Gori

    (Dipartimento di Scienze per l'Economia e l'Impresa)

  • Giorgio Ricchiuti

    (Dipartimento di Scienze per l'Economia e l'Impresa)

Abstract

In this paper, we analyze a heterogeneous agent model in which the fundamental exchange rate is endogenously determined by the real markets. The exchange rate market and the real markets are linked through the balance of payments. We have analytically found that there exists at least a steady state in which the exchange rate is at its fundamental value and incomes of both countries are equal to the autonomous components times the over-simplified multiplier (as in the Income-Expenditure model). That steady state can be unique and always unstable when all agents act as contrarians, while when agents act as fundamentalists is unique but its stability depends on the reactivity of actors of the market. Finally, we show that the (in)stability of the economic system depends on both the reactivity of the markets and that of different type of agents involved.

Suggested Citation

  • Michele Gori & Giorgio Ricchiuti, 2014. "A Dynamic Exchange Rate Model with Heterogeneous Agents," Working Papers - Economics wp2014_15.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:frz:wpaper:wp2014_15.rdf
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    2. Marwil J. Davila-Fernandez & Serena Sordi, 2025. "FX-constrained growth: Fundamentalists, chartists and the dynamic trade-multiplier," Papers 2508.02252, arXiv.org.
    3. Mignot, Sarah & Westerhoff, Frank H., 2023. "Explaining the stylized facts of foreign exchange markets with a simple agent-based version of Paul de Grauwe's chaotic exchange rate model," BERG Working Paper Series 189, Bamberg University, Bamberg Economic Research Group.
    4. Delli Gatti, Domenico & Ferraresi, Tommaso & Gusella, Filippo & Popoyan, Lilit & Ricchiuti, Giorgio & Roventini, Andrea, 2025. "The complex interplay between exchange rate and real markets: An agent-based model exploration," Journal of Economic Behavior & Organization, Elsevier, vol. 238(C).
    5. F. Cavalli & A. Naimzada & N. Pecora, 2022. "A stylized macro-model with interacting real, monetary and stock markets," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(1), pages 225-257, January.
    6. Filippo Gusella & Giorgio Ricchiuti, 2024. "Endogenous cycles in heterogeneous agent models: a state-space approach," Journal of Evolutionary Economics, Springer, vol. 34(4), pages 739-782, December.
    7. Giovanni Campisi & Anastasiia Panchuk & Fabio Tramontana, 2024. "A discontinuous model of exchange rate dynamics with sentiment traders," Annals of Operations Research, Springer, vol. 337(3), pages 913-935, June.
    8. Domenico Delli Gatti & Tommaso Ferraresi & Filippo Gusella & Lilit Popoyan & Giorgio Ricchiuti & Andrea Roventini, 2024. "The interplay between real and exchange rate market: an agent-based model approach," Working Papers - Economics wp2024_10.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    9. Tedeschi, Gabriele & Recchioni, Maria Cristina & Berardi, Simone, 2019. "An approach to identifying micro behavior: How banks’ strategies influence financial cycles," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 329-346.
    10. Marinakis, Yorgos D. & White, Reilly & Walsh, Steven T., 2020. "Lotka–Volterra signals in ASEAN currency exchange rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 545(C).
    11. Sarah Mignot & Frank Westerhoff, 2025. "Explaining the Stylized Facts of Foreign Exchange Markets with a Simple Agent-based Version of Paul de Grauwe’s Chaotic Exchange Rate Model," Computational Economics, Springer;Society for Computational Economics, vol. 65(2), pages 845-876, February.

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    Keywords

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    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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