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Heterogenous Behavioral Expectations, FX Fluctuations and Dynamic Stability in a Stylized Two-Country Macroeconomic Model

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  • Christian R. Proano

    () (IMK at the Hans Boeckler Foundation)

Abstract

In this paper the role of behavioral forecasting rules of chartist and fun-damentalist type for the dynamic macroeconomic stability of a two-country system is investigated both analytically and numerically. The main result of the paper is that for large trend-chasing parameters in the chartist rule used in the FX market, not only this market but the entire macroeconomic system is destabilized. This takes place despite of the presence of monetary policy rules in both countries which satisfy the Taylor Principle.

Suggested Citation

  • Christian R. Proano, 2009. "Heterogenous Behavioral Expectations, FX Fluctuations and Dynamic Stability in a Stylized Two-Country Macroeconomic Model," IMK Working Paper 03-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:3-2009
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    File URL: http://www.boeckler.de/pdf/p_imk_wp_3_2009.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    (D)AS-AD; monetary policy; behavioral heterogenous expectations; FX market dynamics.;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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