ABSTRACT
The previous three chapters have focused on establishing basic facts about exchange rates and building models to explain currency price determination. It has been argued that, fi rst and foremost, fi nancial capital fl ows play the dominant role in today’s market (in both the short and long run). Those fl ows are in turn a function of agents’ potentially volatile expectations as guided by their mental model, which is related but not inevitably bound to what might be traditionally called “fundamental” factors. Psychological infl uences such as bandwagon effects and forecast-construction bias may also affect market participants’ forecast. That crises emerge is a function of the means by which exchange rates are determined, plus agents’ overly optimistic expectations of both profi t and the level of debt they can safely carry.
