Paul De Grauwe, born in Ukkel, Belgium, in 1946. Ph.D. from the Johns Hopkins University, Baltimore. Professor of International Economics at the Katholieke Universiteit Leuven.
Jelle Zijlstra Professorial Fellow (1 September 2003 – 30 November 2003)
MODELLING OF THE FOREIGN EXCHANGE MARKET
I was able to integrate previous pieces of the model into a more general one. The model now consists of a financial part in which agents allocate their portfolio between domestic and foreign assets. These agents make forecasts using simple rules, which they check for profitability. The model produces results that closely mimic observed exchange rate dynamics. More particularly, the model predicts that bubbles and crashes will occur at unpredictable moments, and shows that the exchange rate is disconnected from the fundamentals most of the time. I prepared a lecture for the Jelle Zijlstra Lecture series. It dealt with the future prospects of the enlarged Eurozone and analysed two themes. The first one was whether the enlarged Eurozone is an optimal currency area. I concluded that it is probably not, at least today, although it may become so in the foreseeable future. The second theme dealt with the long-term prospects of the Eurozone. I concluded that it is essential to create stronger European-wide social insurance systems. Failure to do so will undermine the Eurozone.