Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict
AbstractOpinion is divided on whether it is better to have a single world Â money or variable exchange rates. Â Pope, Selten and von Hagen (2003) Â propose that fresh light would be shed via an analysis that allows Â for seven complexity impacts on the exchange rate that are Â underplayed (where not entirely absent) from current analyses: 1) the Â role of official sector, including its central bank; 2) the numerous Â official and private sector goals; 3) the disparate degrees of market Â power of different sorts of private agents; 4) the documentation that Â essentially all shocks to the exchange rate are generated by human Â decisions; 5) the non-maximising heuristics that in the complex Â economy agents use; 6) heterogenous beliefs. Â This paper analyses a Â closed form game theoretic solution of version 1 of a model that Â combines impacts 1 to 4 with the conventional finance assumption that Â all agents maximise their utility. Â Impact 1) precludes private Â agents being able to destabilise the exchange rate against the Â cooperation of the central banks required by the game theoretic Â solution. Â Impact 4) excludes random events and other exogenous Â shocks such as meteors falling from the sky. Â The rational maximising Â assumption in turn precludes all other sources of shocks and thus any Â need for a variable exchange rate to equilibrate after shocks. Â We Â then modify version 1 of our model substituting for the maximising Â assumption impacts 5 to 7, impacts that allow shocks from humans to Â be consistently incorporated. Â We do so by means of an experimental Â investigation which indicates that central bankers less than fully Â cooperate, leaving scope for private speculators to support their Â preferred currency. Â From the viewpoint of the game theoretic Â equilibrium, the resultant exchange rate changes render equilibrium Â unspecified. Â A single world money avoids disruptive exchange rate Â changes from less than fully cooperating central banks, exchange rate Â changes caused by central bank conflicts and that cannot be Â classified as equilibrating.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse18_2007.
Date of creation: Dec 2007
Date of revision:
Contact details of provider:
Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de
central bank; cooperation; conflict; exchange rate; experiment; market power; heuristics; heterogenous beliefs; personality; interpersonal dynamics; friendship; complex; destabilising speculators; irrational central bankers;
Other versions of this item:
- Robin Pope & Reinhard Selten & Sebastian Kube & Johannes Kaiser & JÃ¼rgen von Hagen, 2007. "Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict," Bonn Econ Discussion Papers bgse19_2007, University of Bonn, Germany.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
- B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other
- C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-08 (All new papers)
- NEP-CBA-2008-03-08 (Central Banking)
- NEP-CBE-2008-03-08 (Cognitive & Behavioural Economics)
- NEP-IFN-2008-03-08 (International Finance)
- NEP-MON-2008-03-08 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hausken, Kjell & Plumper, Thomas, 2002. " Containing Contagious Financial Crises: The Political Economy of Joint Intervention into the Asian Crisis," Public Choice, Springer, vol. 111(3-4), pages 209-36, June.
- Wang, Yajie & Hui, Xiaofeng & Soofi, Abdol S., 2007. "Estimating renminbi (RMB) equilibrium exchange rate," Journal of Policy Modeling, Elsevier, vol. 29(3), pages 417-429.
- Frankel, Jeff & Froot, Ken, 1986.
"Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations,"
Department of Economics, Working Paper Series
qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March.
- Rakesh Bissoondeeal & Jane Binner & Thomas Elger, 2009. "Monetary models of exchange rates and sweep programs," Applied Financial Economics, Taylor & Francis Journals, vol. 19(14), pages 1117-1129.
- Lucas Papademos, 2006. "Policy-making in EMU: strategies, rules and discretion," Economic Theory, Springer, vol. 27(1), pages 25-38, 01.
- Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
- Sordi, Serena & Vercelli, Alessandro, 2006. "Financial fragility and economic fluctuations," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 543-561, December.
- Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory And Anticipatory Feelings," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 55-79, February.
- Jeffrey A. Frankel & C. Fred Bergsten & Michael L. Mussa, 1994. "Exchange Rate Policy," NBER Chapters, in: American Economic Policy in the 1980s, pages 293-366 National Bureau of Economic Research, Inc.
- Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
- Thomas J. Courchene, 1999. "Alternative North American Currency Arrangements: A Research Agenda," Canadian Public Policy, University of Toronto Press, vol. 25(3), pages 308-314, September.
- Allais, Maurice, 1972. "Forgetfulness and Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 4(1), pages 40-73, Part I Fe.
- Borch, Karl, 1969. "A Note on Uncertainty and Indifference Curves," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 1-4, January.
- Jeffrey A. Frankel, 1985. "The Dazzling Dollar," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 199-217.
- 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.
- Kreps, David M. & Porteus, Evan L., 1979. "Temporal von neumann-morgenstern and induced preferences," Journal of Economic Theory, Elsevier, vol. 20(1), pages 81-109, February.
- Harsanyi, John C, 1978. "Bayesian Decision Theory and Utilitarian Ethics," American Economic Review, American Economic Association, vol. 68(2), pages 223-28, May.
- Christian Bauer & Bernhard Herz, 2009. "The Dynamics of Financial Crises and the Risk to Defend the Exchange Rate," Research Papers in Economics 2009-03, University of Trier, Department of Economics.
- Robin Pope, 2009. "Beggar-Thy-Neighbour Exchange Rate Regime Misadvice from Misapplications of Mundell (1961 ) and the Remedy," The World Economy, Wiley Blackwell, vol. 32(2), pages 326-350, 02.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (BGSE Office).
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.