Managed Floats to Damp Shocks like 1982-5 and 2006-9: Field and Laboratory Evidence for Chinese Interest in a Single World Currency
AbstractThis paper’s field evidence is: (1) many official sectors rapidly forget the damage of the 1982-85 exchange rate liquidity crisis and reverted to what caused that crisis, namely a closed economy clean floats perspective; and (2) the 2006-2008/9 exchange rate liquidity shock would have been more drastic but for central bank currency swaps. This evidence is bolstered by a laboratory experiment that incorporates more aspects of real world complexity and more different sorts of official and private sector agents than are feasible in econometric or algebraic investigations and employs a new central bank cooperation-conflict model of exchange rate determination , and is within an umbrella theory of Pope, namely SKAT, the Stages of Knowledge Ahead Theory. SKAT allows for risk effects from stages omitted in normal models, including those from (a) difficulties of agents in evaluating alternatives in a complex environment in which the assumed maximization of expected utility is impossible; and (b) preference for safety and reliability is not trivialized. Our joint field plus laboratory evidence indicates that official sectors should maintain an international exchange rate oriented perspective, or better yet, a single world currency as recommended by Zhou Xiaochuan, head of the People’s Bank of China. To avoid rapid forgetting of havoc from isolationist clean floats and the value of stable exchange rates, a new syllabus, as under the SKAT umbrella, is fundamental in the education of official sector members in order to furnish them with a coherent alternative intellectual framework to current university education that excludes liquidity crises.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse26_2009.
Date of creation: Oct 2009
Date of revision:
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clean float; managed float; IMF imposed conditions; 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;
Find related papers by JEL classification:
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-19 (All new papers)
- NEP-CBA-2009-12-19 (Central Banking)
- NEP-EXP-2009-12-19 (Experimental Economics)
- NEP-IFN-2009-12-19 (International Finance)
- NEP-MON-2009-12-19 (Monetary Economics)
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