Abstract:

In a flexible exchange rate system much of the movement in exchange rates can not be accounted for, and theories of exchange rate determination which are based on rational expectations still seek to explain those movement features. De Grauwe proposes an alternative way of modeling exchange rates. Instead of stressing forward-looking behavior, he emphasizes that in an uncertain circumstance economic a-gents may prefer to use backward-looking' rules for most of the time. Such behavior can be derived from an assumption of near-rationality.

Key words: near-rational expectation, a range of agnosticism, technical analysis, fundamental analysis, risk premium