Imperfect Knowledge and Behaviour in the Foreign Exchange Market

Michael Goldberg · Roman Frydman

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Economic theories and models

Abstract

This paper explores the consequences of imperfect knowledge for exchange rate dynamics within the monetary class of models. Our framework, which we call the theories consistent expectations (TCE) framework, provides a particular formalisation of a world in which agents use theories in order to look forward, but in which these theories provide only qualitative knowledge rather than quantitative knowledge about the economy. We find that as long as agents possess at least some degree of imperfect knowledge, the monetary models of the exchange rate generate dynamics consistent with the behaviour observed in the literature.

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References

1936The General Theory of Employment, Interest and Money, by John Maynard Keynes 1976Expectations and Exchange Rate Dynamics 1990Positive Feedback Investment Strategies and Destabilizing Rational Speculation 2003The Economics of Exchange Rates 1990Lectures on Macroeconomics.1982Bubbles, Rational Expectations and Financial Markets 1992Herd on the Street: Informational Inefficiencies in a Market with Short‐Term Speculation 1977A Monetary Approach To The Exchange Rate: Doctrinal Aspects And Empirical Evidence

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