ABSTRACT
Here begins the process of building the Post Keynesian alternative, something that will continue through Chapter Five. By then, a formal model will have been developed whose features include equilibrium trade imbalances, less-than-full employment, endogenous money, exchange rates marked by volatility and bandwagon effects, and an explanation of market participants’ forecasts wherein expectations are guided by a mental model that is shaped by social forces. The goal of this chapter is to examine the institutional structure of global currency markets and the social and psychological factors affecting market participants’ forecasting and decision making. Among the phenomena explained will be volatility, bandwagon effects, and forecast-construction bias. Reference will be made to Institutionalism, Keynes’ General Theory, and the psychological research of Kahneman and Tversky.2
