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MONETARY POLICY RULES AND MACROECONOMIC STABILIZATION IN SMALL OPEN ECONOMIES UNDER BEHAVIORAL FX TRADING: INSIGHTS FROM NUMERICAL SIMULATIONS

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  • Manuscript received 16.10.09; final version received 6.2.12.

Abstract

In this paper the interaction between foreign exchange (FX) markets driven by trading based on behavioral forecasting rules and the macroeconomy of a small open economy is investigated. A special focus of the paper is set on the consequences of chartism or technical analysis for the stability at the macroeconomic level. Furthermore, the performance of alternative monetary policy rules concerning the overall stabilization of the economy is investigated through numerical analysis.

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