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Welfare and excess volatility of exchange rates

  • M. Salto

    ()

  • T. Pietra

    ()

We study the properties of a GEI model with nominal assets, outside money (injected into the economy as in Magill and Quinzii (J Math Econ 21:301–342, 1992 )), and multiple currencies. We analyze the existence of monetary equilibria and the structure of the equilibrium set under two different assumptions on the determination of the exchange rates. If currencies are perfect substitutes, equilibrium allocations are indeterminate and, generically, sunspot equilibria exist. Generically, given a nonsunspot equilibrium, there are Pareto improving (and Pareto worsening) sunspot equilibria associated with an increase in the volatility of the future exchange rates. We interpret this property as showing that, in general, there is no clear-cut effect on welfare of the excess volatility of exchange rates, even when due to purely extrinsic phenomena. Copyright Springer-Verlag 2013

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File URL: http://hdl.handle.net/10.1007/s00199-011-0654-2
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 52 (2013)
Issue (Month): 2 (March)
Pages: 501-529

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Handle: RePEc:spr:joecth:v:52:y:2013:i:2:p:501-529
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  1. Irasema Alonso, 2004. "Persistent, Nonfundamental Exchange Rate Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 687-706, July.
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