RIME: WHAT CAN FINANCIAL ECONOMICS TEACH US ABOUT EXCHANGE RATES? 137 Chapter 8- What can financial economics teach us about

This article looks at two new directions in financial economics- behavioural finance and the microstructure approach to foreign exchange- in order to cast light on mechanisms driving exchange rate movements. Changes in the Norwegian krone exchange rate during 2002 and 2003 are used as an example. The conclusion is that deviations from the “equilibrium ex-change rate ” may be persistent, and that it is reasonable to assume (in contrast to standard macroeconomic assumptions) that participants in the foreign exchange market have different information sets, and that this can affect the determination of the exchange rate