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Title:Fundamental and non-fundamental equilibria in the foreign exchange market : a behavioural finance framework PDF Logo
Authors:De Grauwe, Paul
Dieci, Roberto
Grimaldi, Marianna
Issue Date:2005
Series/Report no.:CESifo working papers 1431
Abstract:We develop a simple model of the exchange rate in which agents optimize their portfolio and use different forecasting rules. They check the profitability of these rules ex post and select the more profitable one. This model produces two kinds of equilibria, a fundamental and a bubble one. In a stochastic environment the model generates a complex dynamics in which bubbles and crashes occur at unpredictable moments. We contrast these ?behavioural? bubbles with ?rational? bubbles.
Subjects:exchange rate
bounded rationality
heterogeneous agents
bubbles and crashes
complex dynamics
basins of attraction
JEL:G10
F41
F31
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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