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The Principles of Exchange Rate Determination in an International Financial Experiment

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  • Noussair, Charles N
  • Plott, Charles R
  • Riezman, Raymond G

Abstract

This paper reports the first experiments designed to explore the behavior of economies with prominent features of international finance. Two 'countries,' each with its own currency, were created. International trade could take place only through the operation of markets for currency. Prices of goods, as well as the exchange rate, evolve over time toward the predictions of the competitive general equilibrium model. However, both the law of one price and purchasing power parity can be rejected for reasons that do not appear in the literature. Patterns of international trade were as predicted by the law of comparative advantage. Copyright 1997 by the University of Chicago.

Suggested Citation

  • Noussair, Charles N & Plott, Charles R & Riezman, Raymond G, 1997. "The Principles of Exchange Rate Determination in an International Financial Experiment," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 822-861, August.
    • Handle: RePEc:ucp:jpolec:v:105:y:1997:i:4:p:822-61
    DOI: 10.1086/262095
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    References listed on IDEAS

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    1. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    2. Grilli, Vittorio & Roubini, Nouriel, 1992. "Liquidity and exchange rates," Journal of International Economics, Elsevier, vol. 32(3-4), pages 339-352, May.
    3. Smith, Vernon L. & Williams, Arlington W., 1982. "The effects of rent asymmetries in experimental auction markets," Journal of Economic Behavior & Organization, Elsevier, vol. 3(1), pages 99-116, March.
    4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    5. Goodwin, Barry K. & Grennes, Thomas & Wohlgenant, Michael K., 1990. "Testing the law of one price when trade takes time," Journal of International Money and Finance, Elsevier, vol. 9(1), pages 21-40, March.
    6. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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