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Welfare and excess volatility of exchange rates

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  • M. Salto
  • T. Pietra

Abstract

We study the properties of a GEI model with nominal assets, outside money (injected into the economy as in Magill and Quinzii), 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.

Suggested Citation

  • M. Salto & T. Pietra, 2011. "Welfare and excess volatility of exchange rates," Working Papers wp758, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:wp758
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    References listed on IDEAS

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    Cited by:

    1. M. Salto & T. Pietra, 2013. "Welfare and excess volatility of exchange rates," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 501-529, March.
    2. Alexandre Cunha, 2013. "On the relevance of floating exchange rate policies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(2), pages 357-382, June.
    3. Mendolicchio, Concetta & Pietra, Tito, 2016. "A re-examination of constrained Pareto inefficiency in economies with incomplete markets," IAB Discussion Paper 201612, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    4. Mendolicchio, C. & Pietra, T., 2016. "Endowment redistribution and Pareto improvements in GEI economies," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 181-190.

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    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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