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Welfare and excess volatility of exchange rates

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  • 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.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number wp758.

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Date of creation: Jun 2011
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Handle: RePEc:bol:bodewp:wp758

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  1. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
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  15. PIETRA, Tito, . "The structure of the set of sunspot equilibria in economies with incomplete financial markets," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -997, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Cited by:
  1. M. Salto & T. Pietra, 2011. "Welfare and excess volatility of exchange rates," Working Papers, Dipartimento Scienze Economiche, Universita' di Bologna wp758, Dipartimento Scienze Economiche, Universita' di Bologna.

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