Exchange rate determination, macroeconomic dynamics and stability under heterogeneous behavioral FX expectations

Abstract:

In this paper the role of behavioral forecasting rules of chartist and fundamentalist type for the dynamic macroeconomic stability of a two-country system is investigated. The main result of the paper is that for large trend-chasing parameters in the chartist rule used in the FX market, not only this market but also the entire macroeconomic system is destabilized. This outcome takes place despite of a monetary policy conduction in both countries which satisfies the Taylor Principle, and thus highlights the limits of monetary policy as a macroeconomic stabilization instrument in a world of boundedly rational agents. © 2010 Elsevier B.V.

Año de publicación:

2011

Keywords:

• (D)AS-AD
• Monetary policy
• FX market dynamics
• Behavioral heterogenous expectations

Fuente:

scopus