The exchange rate and its fundamentals in a complex world
de Grauwe, P.
& Grimaldi, M.
(2005).
The exchange rate and its fundamentals in a complex world.
Review of International Economics,
13(3), 549-575.
https://doi.org/10.1111/j.1467-9396.2005.00523.x
& Grimaldi, M.
(2005).
The exchange rate and its fundamentals in a complex world.
Review of International Economics,
13(3), 549-575.
https://doi.org/10.1111/j.1467-9396.2005.00523.x
We develop a nonlinear exchange rate model with heterogeneous agents. Some agents adopt a “fundamentalist” forecasting rule, while others use a “chartist” forecasting rule. We show that the model is capable of explaining the empirical puzzles relating to exchange rate movements. In particular, the model explains the “exchange rate determination” and PPP puzzles, the excess volatility, and fat tails in exchange rate returns.