Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict
Opinion is divided on whether it is better to have a single world Â money or variable exchange rates. Â Pope, Selten and von Hagen (2003) Â propose that fresh light would be shed via an analysis that allows Â for seven complexity impacts on the exchange rate that are Â underplayed (where not entirely absent) from current analyses: 1) the Â role of official sector, including its central bank; 2) the numerous Â official and private sector goals; 3) the disparate degrees of market Â power of different sorts of private agents; 4) the documentation that Â essentially all shocks to the exchange rate are generated by human Â decisions; 5) the non-maximising heuristics that in the complex Â economy agents use; 6) heterogenous beliefs. Â This paper analyses a Â closed form game theoretic solution of version 1 of a model that Â combines impacts 1 to 4 with the conventional finance assumption that Â all agents maximise their utility. Â Impact 1) precludes private Â agents being able to destabilise the exchange rate against the Â cooperation of the central banks required by the game theoretic Â solution. Â Impact 4) excludes random events and other exogenous Â shocks such as meteors falling from the sky. Â The rational maximising Â assumption in turn precludes all other sources of shocks and thus any Â need for a variable exchange rate to equilibrate after shocks. Â We Â then modify version 1 of our model substituting for the maximising Â assumption impacts 5 to 7, impacts that allow shocks from humans to Â be consistently incorporated. Â We do so by means of an experimental Â investigation which indicates that central bankers less than fully Â cooperate, leaving scope for private speculators to support their Â preferred currency. Â From the viewpoint of the game theoretic Â equilibrium, the resultant exchange rate changes render equilibrium Â unspecified. Â A single world money avoids disruptive exchange rate Â changes from less than fully cooperating central banks, exchange rate Â changes caused by central bank conflicts and that cannot be Â classified as equilibrating.
|Date of creation:||Dec 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Andrew Caplin & John Leahy, 2001.
"Psychological Expected Utility Theory And Anticipatory Feelings,"
The Quarterly Journal of Economics,
MIT Press, vol. 116(1), pages 55-79, February.
- Caplin, Andrew & Leahy, John, 1997. "Psychological Expected Utility Theory and Anticipatory Feelings," Working Papers 97-37, C.V. Starr Center for Applied Economics, New York University.
- Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
- Jeffrey A. Frankel & C. Fred Bergsten & Michael L. Mussa, 1994. "Exchange Rate Policy," NBER Chapters, in: American Economic Policy in the 1980s, pages 293-366 National Bureau of Economic Research, Inc.
- Frankel, Jeffrey A & Froot, Kenneth A, 1987.
"Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations,"
American Economic Review,
American Economic Association, vol. 77(1), pages 133-53, March.
- Frankel, Jeff & Froot, Ken, 1986. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," Department of Economics, Working Paper Series qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Kreps, David M. & Porteus, Evan L., 1979. "Temporal von neumann-morgenstern and induced preferences," Journal of Economic Theory, Elsevier, vol. 20(1), pages 81-109, February.
- Hausken, Kjell & Plumper, Thomas, 2002. " Containing Contagious Financial Crises: The Political Economy of Joint Intervention into the Asian Crisis," Public Choice, Springer, vol. 111(3-4), pages 209-36, June.
- David Cobham, 2006. "The Overvaluation of Sterling Since 1996: How the Policy makers Responded and Why," Economic Journal, Royal Economic Society, vol. 116(512), pages F185-F207, 06.
- Harsanyi, John C, 1978. "Bayesian Decision Theory and Utilitarian Ethics," American Economic Review, American Economic Association, vol. 68(2), pages 223-28, May.
- Sordi, Serena & Vercelli, Alessandro, 2006. "Financial fragility and economic fluctuations," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 543-561, December.
- 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.
- Rakesh Bissoondeeal & Jane Binner & Thomas Elger, 2009. "Monetary models of exchange rates and sweep programs," Applied Financial Economics, Taylor & Francis Journals, vol. 19(14), pages 1117-1129.
- Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
- Allais, Maurice, 1972. "Forgetfulness and Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 4(1), pages 40-73, Part I Fe.
- Kilponen, Juha & Leitemo, Kai, 2007. "Discretion and the transmission lags of monetary policy," Research Discussion Papers 8/2007, Bank of Finland.
- David Cobham, 2002. "The Exchange Rate as a Source of Disturbances: The UK 1979-2000," National Institute Economic Review, National Institute of Economic and Social Research, vol. 181(1), pages 96-112, July.
- Borch, Karl, 1969. "A Note on Uncertainty and Indifference Curves," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 1-4, January.
- Wang, Yajie & Hui, Xiaofeng & Soofi, Abdol S., 2007. "Estimating renminbi (RMB) equilibrium exchange rate," Journal of Policy Modeling, Elsevier, vol. 29(3), pages 417-429.
- Bonpasse, Morrison, 2006. "The Single Global Currency: Common Cents for the World," MPRA Paper 1175, University Library of Munich, Germany.
- Lucas Papademos, 2006. "Policy-making in EMU: strategies, rules and discretion," Economic Theory, Springer, vol. 27(1), pages 25-38, 01.
- Jeffrey A. Frankel, 1985. "The Dazzling Dollar," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 199-217.
When requesting a correction, please mention this item's handle: RePEc:bon:bonedp:bgse18_2007. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (BGSE Office)
If references are entirely missing, you can add them using this form.