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Currency Market Participants' Mental Model and the Collapse of the Dollar: 2001-2008

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  • John Harvey

    () (Department of Economics, Texas Christian University)

Abstract

It is well accepted among Institutionalist and Post Keynesian scholars that portfolio investment markets are driven by agents' expectations rather than "the fundamentals." This explains, it is argued, why asset and currency prices are so much more volatile than and often clearly out of line with what we would otherwise consider to be their underlying determinants. What is rarely addressed, however, is how those expectations are formed. This paper fills the void by proposing a specific view of agents' expectations based on the mental model they employ to understand currency movements. The paper derives this schematic by examining market participants' psychological propensities and the world view of the subculture of which they are members. It will be shown that the model is consistent with the salient features of the foreign exchange market and it is employed to explain the dollar's fall from 2001 through 2008.

Suggested Citation

  • John Harvey, 2009. "Currency Market Participants' Mental Model and the Collapse of the Dollar: 2001-2008," Working Papers 200901, Texas Christian University, Department of Economics.
  • Handle: RePEc:tcu:wpaper:200901
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    References listed on IDEAS

    as
    1. Thomas Gehrig & Lukas Menkhoff, 2005. "The Rise of Fund Managers in Foreign Exchange:Will Fundamentals Ultimately Dominate?," The World Economy, Wiley Blackwell, vol. 28(4), pages 519-540, April.
    2. Hiroya Akiba, 2004. "Expectations, stability, and exchange rate dynamics under the Post Keynesian hypothesis," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 27(1), pages 125-140.
    3. Yin-Wong Cheung & Menzie D. Chinn & Ian W. Marsh, 2004. "How do UK-based foreign exchange dealers think their market operates?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 289-306.
    4. Stephan Schulmeister, 1988. "Currency speculation and dollar fluctuations," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 41(167), pages 343-365.
    5. John T. Harvey, 2004. "Deviations from uncovered interest rate parity: a Post Keynesian explanation," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 27(1), pages 19-35.
    6. Imad A. Moosa, 2002. "A Test of the Post Keynesian Hypothesis on Expectation Formation in the Foreign Exchange Market," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 24(3), pages 443-457, March.
    7. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-1191, September.
    8. Imad A. Moosa, 2004. "An empirical examination of the Post Keynesian view of forward exchange rates," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 26(3), pages 395-418.
    9. Imad Moosa, 2007. "Neoclassical versus Post Keynesian models of exchange rate determination: a comparison based on nonnested model selection tests and predictive accuracy," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(2), pages 169-185.
    10. John Harvey, 2001. "Psychological and Institutional Forces and the Determination of Exchange Rates," Working Papers 200101, Texas Christian University, Department of Economics.
    11. John T. Harvey, 2002. "The determinants of currency market forecasts: an empirical study," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 25(1), pages 33-49.
    12. John T. Harvey, 1993. "Daily Exchange Rate Variance," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 15(4), pages 515-540, July.
    13. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
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    More about this item

    Keywords

    exchange rates; pyschology; institutionalist;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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