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Exchange Rate Speculation and Heterogeneous Expectations in a Small Open Economy.
1Antalya Bilim University, Dösemealti, Turkey.
Nonlinear Dynamics, Psychology, and Life Sciences
|December 20, 2019
Summary
Speculators' exchange rate expectations significantly drive business cycle fluctuations in small open economies. While regressive expectations stabilize the economy, extrapolative expectations can have ambiguous effects on stability.
Area of Science:
- Macroeconomics
- International Finance
- Econometrics
Background:
- Capital flows in small open economies are sensitive to exchange rate expectations.
- Agent expectations can be homogeneous or heterogeneous, employing various predictive strategies.
Purpose of the Study:
- Analyze the impact of different exchange rate expectation models on business cycle dynamics.
- Investigate the role of speculators' expectations in driving national income and exchange rate fluctuations.
Main Methods:
- Utilized a standard macroeconomic model for a small open economy.
- Employed a combination of analytical and numerical tools to study dynamical systems.
- Modeled homogeneous and heterogeneous expectations, including linear extrapolative and regressive predictors.
Main Results:
- Exchange rate expectations are a key driver of national income and exchange rate volatility.
- Extrapolative expectations exhibit ambiguous effects on dynamic stability due to coexisting attractors.
- Regressive expectations consistently demonstrate a stabilizing influence on the business cycle.
Conclusions:
- Agent expectations are critical determinants of macroeconomic stability and business cycle behavior.
- The nature of expectations (extrapolative vs. regressive) significantly alters the system's response to shocks.
- Policy implications arise regarding the management of speculative behavior in foreign exchange markets.
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