IMPERFECT KNOWLEDGE AND BEHAVIOR IN THE FOREIGN-EXCHANGE MARKET

This paper explores the consequences of imperfect knowledge for exchan ge rate dynamics within I the monetary class of models. Our framework, which we call the theories consistent expectations (TCE) framework, p rovides a particular formalisation of a world in which agents use theo ries in order to look forward, but in which these theories provide onl y qualitative knowledge rather than quantitative knowledge about the e conomy. We find that as long as agents possess al least some degree of imperfect knowledge, the monetary models of the exchange rate generat e dynamics consistent with the behaviour observed in the literature.