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Title: Exchange Rates in Search of Fundamental Variables

Author(s): Paul De Grauwe

Publication Date: December 1994

Keyword(s): Exchange Markets and Exchange Rates

Programme Area(s): International Macroeconomics

Abstract: In this paper it is shown that relatively simple models are capable of generating exchange rate movements that, at least in the short run, are largely disconnected from their fundamental values. The essential ingredient of such models is the hypothesis that economic agents use different information sets. It is assumed that there are two classes of agents, fundamentalists and chartists. The former use the information contained in the model and a forecast of future fundamental variables. The latter forecast the future exchange rate based on past exchange rate movements. The interaction of these two classes of agents creates a non-linearity in the model and is responsible for the complex behaviour of the exchange rate.

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Bibliographic Reference

De Grauwe, P. 1994. 'Exchange Rates in Search of Fundamental Variables'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1073