Microeconomic Modeling and Simulation of Exchange Rate with Heterogeneous Strategies

In this paper, we develop a nonlinear microeconomic model of exchange rate when agents choose heterogeneous strategies. At first, we assume the market exchange rates are determined by the interactions of several agents with mixed strategies, partially fundamentalist and partially chartist. Then the transactions of these agents are made by their different analyses of the market. Agents with different strategies interact with each other and formulate the dynamics of exchange rate movement, which form the whole foreign exchange rate market. The simulation results show that when the parameters of the model are properly selected, bi-strategy and multi-strategy generate the same exchange rate behaviors even though they are different strategies at individual level. The results further show that the volatility of exchange rates is positively correlated with the transaction costs in the goods market.