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Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict

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Author Info

  • Robin Pope
  • Reinhard Selten
  • Sebastian Kube
  • Johannes Kaiser
  • Jürgen von Hagen

    ()

Abstract

The paper traces the dangers in the closed economy perspective of a  monetary policy focused on a domestic inflation goal under a clean  float.  Field evidence of the damage wrought from this perspective is  reinforced by that from a laboratory experiment.  The laboratory  experiment avoids measurement errors to which econometric estimation  is subject concerning omitted or inadequately proxied determinants,  non-normally distributed errors, inadequate degrees of freedom, false  assumptions of temporal independence and false synchronicity in  decision response lags to stimuli. Our laboratory experiment also  embeds a new theory of exchange rate determination involving the  uncontroversial power of fully cooperating central banks to totally  fix the exchange rate. The new model is within a broader theory that  includes risk effects normally excluded, SKAT, the Stages of  Knowledge Ahead Theory. We use SKAT to analyse outliers in our  experimental results, and indicate some new directions and foci for  econometric work.  Our laboratory results point to the superiority of  dollarisation, currency unions, a single world money over even dirty  floats that include the exchange rate as an objective in its own right.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse19_2007.pdf
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse19_2007.

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Length: 52
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:bon:bonedp:bgse19_2007

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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

Related research

Keywords: 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.;

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  1. 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.
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  13. 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.
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  15. Jeffrey A. Frankel, 1985. "The Dazzling Dollar," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 199-217.
  16. 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.
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Cited by:
  1. 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.
  2. 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.

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