Imperfect Knowledge and Behaviour in the Foreign Exchange Market.

This paper explores the consequences of imperfect knowledge for exchange rate dynamics within the monetary class of models. The authors' framework, which they call the theories consistent expectations framework, provides a particular formalization of a world in which agents use theories in order to look forward but in which these theories provide only qualitative knowledge rather than quantitative knowledge about the economy. The authors find that, as long as agents possess at least some degree of imperfect knowledge, the monetary models of the exchange rate generate dynamics consistent with the behavior observed in the literature. Copyright 1996 by Royal Economic Society.