Normal view MARC view

Imperfect knowledge economics: exchange rates and risk

Author: Frydman, Roman ; Goldberg, MichaelPublisher: Princeton University Press, 2007.Language: EnglishDescription: 340 p. ; 24 cm.ISBN: 9780691121604Type of document: BookBibliography/Index: Includes bibliographical references and index
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Item type Current location Collection Call number Status Date due Barcode Item holds
Book Europe Campus
Main Collection
Print HB172.5 .F79 2007
(Browse shelf)
Available 001217789
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Includes bibliographical references and index


Imperfect Knowledge Economics Exchange Rates and Risk Contents Foreword by Edmund S. Phelps Acknowledgments List of Abbreviations PART I From Early Modern Economics to Imperfect Knowledge Economics 1 Recognizing the Limits of Economists' Knowledge The Overreach of Contemporary Economics The Aim of This Book Contemporary Models in a World of Imperfect Knowledge The Non-Fully Intelligible Individual IKE Models IKE of Exchange Rates and Risk Imperfect Knowledge and Policy Analysis From Contemporary Economics to Imperfect Knowledge Economics 2 A Tradition Interrupted The Stranglehold of the Contemporary Approach The Non-Fully Intelligible Individual in Early Modern Economics Jettisoning Insights from Early Modern Analysis xiii xxi xxiii 1 3 3 6 8 13 14 20 23 24 26 27 34 38 3 Flawed Foundations: The Gross Irrationality of "Rational Expectations" and Behavioral Models Conventional and Behavioral Representations of Preferences with Uncertain Outcomes Self-Interest, Social Context, and Individual Decisions Individual Behavior and Aggregate Outcomes From Early Modern to Phelps's Microfoundations "Rational Expectations": Abandoning the Modern Research Program Diversity of Forecasting Strategies: The Gross Irrationality of "Rational Expectations" Inconsistency in Behavioral Models 42 45 48 49 49 51 54 58 60 65 66 71 72 74 76 79 81 82 86 41 4 Reconsidering Modern Economics Sharp Predictions and Fully Predetermined Representations Qualitative Predictions of Change in Fully Predetermined Models IKE Models of Change IKE Causal-Transition Paths 70 Appendix 4.A: Fully Prespecifying Change in the Social Context Appendix 4.B: Modeling Change in Outcomes with Fully Predetermined Probabilistic Rules 5 Imperfect Knowledge Economics of Supply and Demand Fully Predetermined Representations of Supply and Demand Supply and Demand Analysis in Contemporary Models History as the Future and Vice Versa Supply and Demand Analysis in IKE Models Irreversibility of History in IKE Models PART II "Anomalies" in Contemporary Models of Currency Markets 6 The Overreach of Contemporary Models of Asset Markets Describing Forecasting Behavior Fully Predetermined Representations of Forecasting Strategies and Their Revisions Modeling Economic Change with a Time-Invariant Structure Models with Fully Predetermined Changes in Structure 89 91 92 93 96 101 Prespecifying Collective Beliefs in Currency Markets: Bubble Models Appendix 6.A: A Conventional Macroeconomic Model 7 The "Puzzling" Behavior of Exchange Rates: Lost Fundamentals and Long Swings Exchange Rates and Macroeconomic Fundamentals: The Futile Search for a Fully Predetermined Relationship 114 The Exchange Rate Disconnect Puzzle: An Artifact of the Contemporary Approach 120 Macroeconomic Fundamentals over Long Horizons: Self-Limiting Long Swings 121 Can REH Models Explain Long Swings in Exchange Rates? 126 REH Bubble Models and the Pattern of Long Swings in Real World Markets 131 Lost Fundamentals and Forsaken Rationality: Behavioral Models 134 8 "Anomalous" Returns on Foreign Exchange: Is It Really Irrationality? The Record on Foreign Exchange Returns An REH Risk Premium? Is Irrationality the Answer? The Forward-Discount "Anomaly": Another Artifact of the Contemporary Approach 104 107 113 138 140 144 147 151 PART III Imperfect Knowledge Economics of Exchange Rates and Risk 153 9 Modeling Preferences in Asset Markets: Experimental Evidence and Imperfect Knowledge Prospect Theory and Speculative Decisions Endogenous Loss Aversion and Limits to Speculation Experimental Evidence and Behavioral Finance Models Moving beyond Behavioral Finance Models IKE Representations of Preferences in Asset Markets: Individual Uncertainty Premiums Imperfect Knowledge and Preferences over Gambles: Endogenous Prospect Theory Appendix 9.A: Limits to Speculation under Endogenous Loss Aversion 155 159 167 170 173 176 179 180 10 Modeling Individual Forecasting Strategies and Their Revisions 183 Theories Consistent Expectations Hypothesis IKE Representations of Revisions: An Overview Trend Restriction Conservative Revisions Revisions of the Expected Unit Loss 11 Bulls and Bears in Equilibrium: Uncertainty-Adjusted Uncovered Interest Parity Momentary Equilibrium in the Foreign Exchange Market Equilibrium under Risk Aversion Uncertainty-Adjusted UIP 12 IKE of the Premium on Foreign Exchange: Theory and Evidence An IKE House Money Model: Time-Varying Preferences An IKE Gap Plus Model: Autonomous Revisions in Forecasting Strategies Confronting the Gap Plus and House Money Models with Time-Series Data The Gap Plus Model and the Frequency of Sign Reversals Avoiding the Presumption of Gross Irrationality Appendix 12.A 13 The Forward Discount "Anomaly": The Peril of Fully Prespecifying Market Efficiency Bilson-Fama Regression and the Forward Discount "Anomaly" 245 Structural Instability of the BF Regression and the Gap Plus Model BF Regression and Market Efficiency 14 Imperfect Knowledge and Long Swings in the Exchange Rate A Monetary Model Invariant Representations and an Unbounded Swing Away from PPP Fixed Policy Rules and Invariant Representations? An IKE Model of Exchange Rate Swings Conventional and Behavioral Views of Reversals Imperfect Knowledge and Self-Limiting Long Swings Appendix 14.A: Solution with an Invariant Representation Appendix 14.B: Exchange Rate Swings and Sticky Goods Prices 185 191 192 194 197 203 204 205 210 218 220 223 225 238 241 242 243 246 252 258 260 266 272 272 278 279 283 283 15 Exchange Rates and Macroeconomic Fundamentals: Abandoning the Search for a Fully Predetermined Relationship Structural Change in the Causal Mechanism Macroeconomic Fundamentals and the Exchange Rate in the 1970s Are the Monetary Models Consistent with Empirical Evidence? Macroeconomic Fundamentals and the Exchange Rate in the 1980s Appendix 15.A: Description of Data References Index 292 295 297 304 309 312 313 331

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