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Experimental Evidence on the Benefits of Eliminating Exchange Rate Uncertainties and Why Expected Utility Theory causes Economists to Miss Them

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Author Info
Robin Pope ()
Reinhard Selten ()
Sebastian Kube ()
Jürgen von Hagen ()

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Abstract

Conclusions favourable to flexible exchange rates typically accord with expected utility theory in ignoring the costs that exchange rate uncertainty generates for governments, central banks, firms and unions in: (i) choosing among available acts; and (ii) existing until learning the outcome of the chosen act. Allowing for these costs involves the stages of knowledge ahead framework, Pope (1983, 1995, 2005). A laboratory experiment suggests that (i) and (ii) together outweigh the advantages of having a flexible exchange rate as an additional instrument for managing a country’s employment, interest rate, price level and international competitiveness goals

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Paper provided by University of Siena in its series Labsi Experimental Economics Laboratory University of Siena with number 010.

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Date of creation: Oct 2006
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Handle: RePEc:usi:labsit:010

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Keywords: experiment;

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C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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References listed on IDEAS
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  4. Selten, Reinhard, . "Features of Experimentally Observed Bounded Rationality," Discussion Paper Serie B 421, University of Bonn, Germany, revised Nov 1997.
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  5. Fisher, Eric O'N, 2001. "Purchasing Power Parity and Interest Parity in the Laboratory," Australian Economic Papers, Blackwell Publishing, vol. 40(4), pages 586-602, December. [Downloadable!] (restricted)
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  6. von Hagen, Jürgen & Zhou, Jizhong, 2004. "The Choice of Exchange Rate Regime in Developing Countries: A Multinational Panel Analysis," CEPR Discussion Papers 4227, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Yin-Wong Cheung & Daniel Friedman, 2008. "Speculative Attacks: A Laboratory Study in Continuous Time," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  8. Eric Fisher, 2004. "Exploring Elements of Exchange Rate Theory in a Controlled Enivronment," Levine's Bibliography 122247000000000199, UCLA Department of Economics. [Downloadable!]
  9. 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. [Downloadable!] (restricted)
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  11. Selten, Reinhard, 1996. "Aspiration Adaptation Theory," Discussion Paper Serie B 389, University of Bonn, Germany.
  12. Noussair, Charles N. & Plott, Charles R. & Riezman, Raymond. G., 1995. "The Principles of Exchange Rate Determination in an International Finance Experiment," Working Papers 908, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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