FX-constrained growth: Fundamentalists, contrarians, trend-extrapolators and the dynamic trade-multiplier

We present a behavioural heterogeneous agents model of the foreign exchange (FX) market designed from the perspective of a developing economy that cannot trade in its national currency. The model distinguishes between speculative and non-speculative FX sectors. We show that, as long as non-speculative demand responds to domestic economic activity, a market-clearing output growth rate exists that, in the steady state, equals the ratio of FX supply growth to the income elasticity of demand for foreign assets, i.e., a generalised dynamic trade multiplier. The model is compatible with endogenous persistent and bounded fluctuations, and the analysis of the basins of attraction reveals coexistence of fixed points and chaotic attractors. Numerical simulations reproduce key stylised facts of exchange rate dynamics, including non-Gaussian distributions, consistent with evidence from Latin American economies. Time-varying parameter estimation confirms that the dynamic trade multiplier closely tracks observed growth rates in the region.