Working Paper: CEPR ID: DP466
Authors: Paul De Grauwe; Hans Dewachter
Abstract: We use a monetary (Dornbusch) model of the exchange rate and introduce speculative dynamics, in which fundamentalists and chartists interact. The resulting non-linearities in the model produce `chaotic' behaviour of the exchange rate. We also analyse the effects of money-stock surprises in such a model. Finally, we study the behaviour of the exchange rate when `news' occurs infrequently.
Keywords: monetary; exchange model; chaos; chartism; fundamental analysis
JEL Codes: 132; 430
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Introduction of speculative dynamics into the Dornbusch model (C54) | Chaotic behavior of exchange rates (F31) |
| Interactions between chartists and fundamentalists (Y10) | Instability and complexity in exchange rate dynamics (F31) |
| Initial conditions (Y20) | Impact of monetary disturbances on exchange rates (F31) |
| Same monetary shock (E39) | Different results depending on when it occurs (C41) |
| Measurement errors in structural models (C20) | Vastly different predictions of exchange rate dynamics (F31) |
| Speculative behavior over time (D84) | Unpredictable exchange rate movements (F31) |
| Unpredictable exchange rate movements (F31) | Challenge to traditional view that all changes are news-driven (G14) |