IDEAS home Printed from https://ideas.repec.org/p/bol/bodewp/wp758.html
   My bibliography  Save this paper

Welfare and excess volatility of exchange rates

Author

Listed:
  • M. Salto
  • T. Pietra

Abstract

We study the properties of a GEI model with nominal assets, outside money (injected into the economy as in Magill and Quinzii), and multiple currencies. We analyze the existence of monetary equilibria and the structure of the equilibrium set under two different assumptions on the determination of the exchange rates. If currencies are perfect substitutes, equilibrium allocations are indeterminate and, generically, sunspot equilibria exist. Generically, given a nonsunspot equilibrium, there are Pareto improving (and Pareto worsening) sunspot equilibria associated with an increase in the volatility of the future exchange rates. We interpret this property as showing that, in general, there is no clear-cut effect on welfare of the excess volatility of exchange rates, even when due to purely extrinsic phenomena.

Suggested Citation

  • M. Salto & T. Pietra, 2011. "Welfare and excess volatility of exchange rates," Working Papers wp758, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:wp758
    as

    Download full text from publisher

    File URL: http://amsacta.unibo.it/4483/1/WP758.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. M. Salto & T. Pietra, 2013. "Welfare and excess volatility of exchange rates," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 501-529, March.
    2. Pietra, Tito, 1992. "The Structure of the Set of Sunspot Equilibria in Economies with Incomplete Financial Markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(3), pages 321-340, July.
    3. Martin, Antoine, 2006. "Endogenous Multiple Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 245-262, February.
    4. Irasema Alonso, 2004. "Persistent, Nonfundamental Exchange Rate Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 687-706, July.
    5. Polemarchakis, H. M., 1988. "Portfolio choice, exchange rates, and indeterminacy," Journal of Economic Theory, Elsevier, vol. 46(2), pages 414-421, December.
    6. Tito Pietra, 2004. "Sunspots, indeterminacy and Pareto inefficiency in economies with incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(3), pages 687-699, October.
    7. Balasko, Yves & Cass, David, 1989. "The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets," Econometrica, Econometric Society, vol. 57(1), pages 135-162, January.
    8. John Kareken & Neil Wallace, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 96(2), pages 207-222.
    9. Pietra, Tito, 1992. "Indeterminacy in general equilibrium economies with incomplete financial markets : Mixed asset returns," Journal of Mathematical Economics, Elsevier, vol. 21(2), pages 155-172.
    10. Magill, M. & Quinzii, M., 1992. "Real effects of money in general equilibrium," Journal of Mathematical Economics, Elsevier, vol. 21(4), pages 301-342.
    11. Tito Pietra, 2001. "The set of sunspot equilibria in economies with incomplete financial markets: variable asset prices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(3), pages 649-659.
    12. Werner, Jan, 1985. "Equilibrium in economies with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 36(1), pages 110-119, June.
    13. Cheung, Yin-Wong & Chinn, Menzie D. & Pascual, Antonio Garcia, 2005. "Empirical exchange rate models of the nineties: Are any fit to survive?," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1150-1175, November.
    14. Manuelli, Rodolfo E & Peck, James, 1990. "Exchange Rate Volatility in an Equilibrium Asset Pricing Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 559-574, August.
    15. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June.
    16. Geanakoplos, John & Mas-Colell, Andreu, 1989. "Real indeterminacy with financial assets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 22-38, February.
    17. King, Robert G. & Wallace, Neil & Weber, Warren E., 1992. "Nonfundamental uncertainty and exchange rates," Journal of International Economics, Elsevier, vol. 32(1-2), pages 83-108, February.
    18. Cass, David, 1992. "Sunspots and Incomplete Financial Markets: The General Case," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(3), pages 341-358, July.
    19. Partha Dasgupta & Douglas Gale & Oliver Hart & Eric Maskin (ed.), 1992. "Economic Analysis of Markets and Games: Essays in Honor of Frank Hahn," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262541599, December.
    20. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    21. Devereux, Michael B. & Engel, Charles, 2002. "Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 913-940, July.
    22. Neumeyer, Pablo Andres, 1998. "Currencies and the Allocation of Risk: The Welfare Effects of a Monetary Union," American Economic Review, American Economic Association, vol. 88(1), pages 246-259, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sara Eugeni, 2019. "Exchange rate volatility and cooperation in an incomplete markets' economy," Working Papers 2019_02, Durham University Business School.
    2. Mendolicchio, C. & Pietra, T., 2019. "A re-examination of constrained Pareto inefficiency in economies with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 80(C), pages 39-55.
    3. M. Salto & T. Pietra, 2013. "Welfare and excess volatility of exchange rates," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 501-529, March.
    4. Mauro Bambi & Sara Eugeni, 2021. "Nominal exchange rate determination and dynamics in an OLG framework," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 93-132, July.
    5. Mendolicchio, C. & Pietra, T., 2016. "Endowment redistribution and Pareto improvements in GEI economies," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 181-190.
    6. Alexandre Cunha, 2013. "On the relevance of floating exchange rate policies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(2), pages 357-382, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eugeni, Sara, 2024. "Nominal exchange rates and net foreign assets' dynamics: The stabilization role of valuation effects," Journal of International Money and Finance, Elsevier, vol. 141(C).
    2. SALTO, Matteo, 1998. "Indeterminacy of equilibrium allocations in monetary open economies," LIDAM Discussion Papers CORE 1998062, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Jean-Marc Tallon, 1995. "Théorie de l'équilibre général avec marchés financiers incomplets," Revue Économique, Programme National Persée, vol. 46(5), pages 1207-1239.
    4. Alexei Deviatov & Igor Dodonov, 2006. "Exchange-rate volatility, exchange-rate disconnect, and the failure of volatility conservation," Working Papers w0079, New Economic School (NES).
    5. Bernard Cornet & Ramu Gopalan, 2010. "Arbitrage and equilibrium with portfolio constraints," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 45(1), pages 227-252, October.
    6. Mauro Bambi & Sara Eugeni, 2021. "Nominal exchange rate determination and dynamics in an OLG framework," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 93-132, July.
    7. Irasema Alonso, 2004. "Persistent, Nonfundamental Exchange Rate Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 687-706, July.
    8. Li Lin & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2016. "On default and uniqueness of monetary equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 245-264, June.
    9. Sara Eugeni, 2019. "Exchange rate volatility and cooperation in an incomplete markets' economy," Working Papers 2019_02, Durham University Business School.
    10. Bisin, Alberto, 1998. "General Equilibrium with Endogenously Incomplete Financial Markets," Journal of Economic Theory, Elsevier, vol. 82(1), pages 19-45, September.
    11. Arifovic, Jasmina, 1996. "The Behavior of the Exchange Rate in the Genetic Algorithm and Experimental Economies," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 510-541, June.
    12. Nagata, Ryo, 2005. "Inefficiency of equilibria with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 41(7), pages 887-897, November.
    13. A. Jofré & R. T. Rockafellar & R. J-B. Wets, 2017. "General economic equilibrium with financial markets and retainability," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(1), pages 309-345, January.
    14. Levine, David K., 1989. "Infinite horizon equilibrium with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 18(4), pages 357-376, September.
    15. Alessandro Citanna & Karl Schmedders, 2002. "Controlling Price Volatility Through Financial Innovation," Working Papers hal-00594367, HAL.
    16. Engel, C., 1996. "A Model of Foreign Exchange Rate Indetermination," Discussion Papers in Economics at the University of Washington 96-13, Department of Economics at the University of Washington.
    17. Magill, Michael & Quinzii, Martine, 2014. "Anchoring expectations of inflation," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 86-105.
    18. Michael Zierhut, 2021. "Indeterminacy of Cournot–Walras equilibrium with incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(1), pages 81-114, February.
    19. Zhang, Cathy, 2014. "An information-based theory of international currency," Journal of International Economics, Elsevier, vol. 93(2), pages 286-301.
    20. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.

    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bol:bodewp:wp758. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dipartimento Scienze Economiche, Universita' di Bologna (email available below). General contact details of provider: https://edirc.repec.org/data/sebolit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.