Exchange rate dynamics in a target zone—A heterogeneous expectations approach

Bauer, Christian; Reitz, Stefan

doi:10.1016/j.jedc.2008.05.008

Cited by 32 publications

(3 citation statements)

References 66 publications

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“…Different investors are assumed to have social interactions and they can switch their forecasting rules with respect to market circumstances, following a formulation by He and Westerhoff (2005) and Bauer, De Grauwe and Reitz (2009). Investors seek to exploit price trends (that is, bull and bear markets).…”

Section: Housing Market Models In Discrete Timementioning

confidence: 99%

Heterogeneous agent models in financial markets: A nonlinear dynamics approach

Zheng

2019

International Review of Financial Analysis

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Studies on financial markets have accumulated consistent evidences of stylized facts and anomalies, which can be characterized by stochastic switching among different co-existing market states but yet difficult to reconcile with traditionally rational expectation theory. When agents are heterogeneous and boundedly rational, recent developments on the role of the adaptive behavior of interacting heterogeneous agents in financial markets have provided a nonlinear dynamics channel to such co-existence of different market states, shedding light into these stylized facts and anomalies. This survey focuses on the nonlinear dynamics approach to model the feedback of evolutionary dynamics of heterogeneous agents and to characterize the underlying mechanisms of the stylized facts and anomalies in financial markets, of which the authors and several coauthors have contributed in several papers.

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Section: Housing Market Models In Discrete Timementioning

confidence: 99%

Heterogeneous agent models in financial markets: A nonlinear dynamics approach

Zheng

2019

International Review of Financial Analysis

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“…Beyond the bounds, the predicted exchange rate begins to move in the opposite direction of the fundamental. Bauer, De Grauwe, and Reitz () rejected the standard target zone model for failing to replicate the dynamic behavior of exchange rates such as excessive volatility, fat tails and volatility clustering; and developed a model with heterogenous traders who can switch between fundamentals or chartistics rules dependent on past profitability. They derived a model in which the fundamental was driven by a nonlinear stochastic differential equation, which through simulations generated exchange rate behavior more consistent with target zone exchange rate data.…”

Section: Review Of Literaturementioning

confidence: 99%

A Model of Inflation Transmission in an Exchange Rate Target Zone

Chua

2018

Bulletin of Econ Res

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I incorporate an exchange rate target zone with intramarginal interventions in a small open economy model. Using the method of undetermined coefficients, I solve for the price level and the nominal exchange rate to determine how price shocks from the large economy affect the small open economy. The results show that the behaviour of inflation transmission within the band differs from the behavior of inflation transmission at the edge of the band of the target zone. Foreign shocks can affect local prices in both cases but the central bank can respond through market interventions within the band while it cannot do so at the edge. Near the edge of the band, a central bank has to intervene to stop the exchange rate from breaching the band. My model predicts that if the interventions are robust, then the exchange rate is mean reverting and an exchange rate target zone can insulate an economy from foreign price shocks. Based on the model, central bank interventions contribute to long‐run price stability in a target zone regime. Finally, I empirically test the model using unit root and cointegration tests, and present some policy implications.

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“…For a literature survey, see, e.g.,(Duarte et al, 2013). For a partial list (with some related literature, including on option pricing), see, e.g.,(Andersen et al, 2001),(Anthony and MacDonald, 1998),(Ayuso and Restoy, 1996),(Ball and Roma, 1994),(Bauer et al, 2009),(Beetsma and Van Der Ploeg, 1994),(Bekaert and Gray, 1998),(Bertola and Caballero, 1992),(Bertola and Svensson, 1993),(Black and Scholes, 1973),(Bo et al, 2011a(Bo et al, , 2001b,(Campa and Chang, 1996),(Carr et al, 1998),(Carr and Jarrow, 1990),(Carr and Linetsky, 2000),(Cavaliere, 1998),(Chinn, 1991),(Cornell, 2003), (Christensen et al, 1998), (De Jong, 1994), (De Jong et al, 2001), (Delgado and Dumas, 1992), (Dominquez and Kenen, 1992), (Driffill and Sola, 2006), (Duarte et al, 2010), (Dumas et al, 1995a, 1995b), (Edin and Vredin, 1993), (Edison et al, 1987),(Flood and Garber, 1991),,(Garman and Kohlhagen, 1983),(Grabbe, 1983),(Harrison, 1985),(Harrison and Pliska, 1981),(Honogan, 1998),(Hull and White, 1987),(Kempa and Nelles, 1999),(Klaster and Knot, 2002),(Klein and Lewis, 1993),(Koedijk et al, 1998),(Krugman, 1991(Krugman, , 1992,(Lai et al, 2008),(Larsen and Sørensen, 2007),(Lin, 2008), Söderlind, 1994a, 1994b),(Lindberg et al, 1993),…”

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confidence: 99%