The Exchange Rate in a Behavioral Finance Framework

Grimaldi, Marianna

doi:10.2307/j.ctv346pzr

Cited by 43 publications

(31 citation statements)

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“…Rationality will be introduced by assuming a willingness to learn from mistakes and therefore a willingness to switch between different heuristics. In making these choices we follow the road taken by an increasing number of macroeconomists, which have developed "agent-based models" and "behavioral macroeconomic models" (Tesfatsion 2001;Tesfatsion and Judd 2006;Colander et al 2008;Farmer and Foley 2009;Gatti et al 2011;Westerhoff 2012;De Grauwe 2012;Hommes and Lustenhouwer 2016).…”

Section: Model Choicementioning

confidence: 99%

The International Synchronisation of Business Cycles: the Role of Animal Spirits

2017

Open Econ Rev

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Business cycles among industrial countries are highly correlated. We develop a two-country behavioral macroeconomic model where the synchronization of the business cycle is produced endogenously. The main channel of synchronization occurs through a propagation of "animal spirits", i.e. waves of optimism and pessimism that become correlated internationally. We find that this propagation occurs with relatively low levels of trade integration. We do not need a correlation of exogenous shocks to generate synchronization. We also empirically test the main predictions of the model.

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Section: Model Choicementioning

confidence: 99%

The International Synchronisation of Business Cycles: the Role of Animal Spirits

2017

Open Econ Rev

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“…For an overall overview in the stock markets see, for example, Barberis and Thaler () and Shiller (). In the foreign exchange markets, among others, Oberlechner and Hocking (), De Grauwe and Grimaldi, () and Oberlechner and Osler ().…”

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confidence: 99%

The Euro‐Dollar Exchange Rate: How Traders’ Behaviour Has Been Affected by the 2007–2008 Financial Crisis

2016

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This paper investigates the dynamics of the Euro/US dollar exchange rate before, during and after the global financial crisis using intra‐day data in a sample covering the period 2003–2011. The paper extends over the conventional empirical framework and specifies an EGARCH (3,1) model to account for heterogeneity in three temporal trading zones and for asymmetric volatility to news. The findings indicate the presence and evolution of differences in Euro/US exchange rate dynamics across American, European and Asian trading zones before and during the financial crisis. As a result of the crisis, traders in the three areas have modified their reactions to scheduled news, unscheduled surprises and content of policies. Developing a better understanding of how traders' behaviour has adjusted since the onset of the crisis is an important issue given the global significance of this exchange rate and the considerable volatility experienced over the sample period.

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“…This kind of simple heuristic has often been used in the behavioural finance literature where agents are assumed to use fundamentalist and chartist rules (see Brock and Hommes ; Branch and Evans ; De Grauwe and Grimaldi ). It is probably the simplest possible assumption that one can make about how agents who experience cognitive limitations, use rules that embody limited knowledge to guide their behaviour .…”

Section: The Behavioural Modelmentioning

confidence: 99%

Inflation Targets and the Zero Lower Bound in a Behavioural Macroeconomic Model

2018

Economica

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We analyse the relation between the level of the inflation target and the zero lower bound (ZLB) imposed on the nominal interest rate in the framework of a behavioral New-Keynesian macroeconomic model in which agents, experiencing cognitive limitations, use adaptive learning forecasting rules. The model produces endogenous waves of optimism and pessimism (animal spirits) that lead to non-normal distributions of the output gap.We find that when the inflation target is too close to zero, the economy can get gripped by "chronic pessimism" that leads to a dominance of negative output gaps and recessions, and in turn feeds back on expectations producing long waves of pessimism. Low inflation targets create the risk of persistence of recessions and low growth. In conclusion, our framework suggests that the 2% inflation target, now pursued by many central banks, is too low. JEL: E03, E31, E32

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The Exchange Rate in a Behavioral Finance Framework

Cited by 43 publications

References 0 publications

The International Synchronisation of Business Cycles: the Role of Animal Spirits

The International Synchronisation of Business Cycles: the Role of Animal Spirits

The Euro‐Dollar Exchange Rate: How Traders’ Behaviour Has Been Affected by the 2007–2008 Financial Crisis

Inflation Targets and the Zero Lower Bound in a Behavioural Macroeconomic Model

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