Speculative rational expectations' exchange rate dynamics with risk averse wealth owners and a monetary authority averse to exchange rate variability

Abstract

In the analysis to follow an important aspect of speculative exchange rate movements is examined in isolation from macroeconomic feedback effects. The over-riding objective here is to investigate the effect of adherence to an interest rate rule by the monetary authority when international speculators behave in a way such that there is full rational expectations with respect to both the mean and variance of the future exchange rate.