Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict
AbstractThe paper traces the dangers in the closed economy perspective of a Â monetary policy focused on a domestic inflation goal under a clean Â float. Â Field evidence of the damage wrought from this perspective is Â reinforced by that from a laboratory experiment. Â The laboratory Â experiment avoids measurement errors to which econometric estimation Â is subject concerning omitted or inadequately proxied determinants, Â non-normally distributed errors, inadequate degrees of freedom, false Â assumptions of temporal independence and false synchronicity in Â decision response lags to stimuli. Our laboratory experiment also Â embeds a new theory of exchange rate determination involving the Â uncontroversial power of fully cooperating central banks to totally Â fix the exchange rate. The new model is within a broader theory that Â includes risk effects normally excluded, SKAT, the Stages of Â Knowledge Ahead Theory. We use SKAT to analyse outliers in our Â experimental results, and indicate some new directions and foci for Â econometric work. Â Our laboratory results point to the superiority of Â dollarisation, currency unions, a single world money over even dirty Â floats that include the exchange rate as an objective in its own right.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse19_2007.
Date of creation: Nov 2007
Date of revision:
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outliers analysis; clean float; dirty float; IMF; exchange rate regime; exchange rate volatility; experiment; SKAT the Stages of Knowledge Ahead Theory; monetary policy; transparent policy; exchange rate shocks; central bank cooperation; central bank conflict; beggar thy neighbor.;
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 bgse18_2007, University of Bonn, Germany.
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- F31 - International Economics - - International Finance - - - Foreign Exchange
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