Elasticity pessimism,expectations, and stability of the foreign exchange market

Conclusions This note has shown that, when trade volumes do not respond sufficiently to deviations from equilibrium of the exchange rate, and when speculative demand for foreign currency is assumed to be a stock demand, the dynamic stability of the foreign exchange market depends crucially on expectational assumptions. Of the expectational assumptions investigated here, only perfect myopic foresight is capable of providing dynamic stability, and then only when the sensitivity of speculators to capital gains is larger than a threshold value determined by other parameter values in the system.