Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict
The paper traces the dangers in the closed economy perspective of a Â monetary policy focused on a domestic inflation goal under a clean Â float. Â Field evidence of the damage wrought from this perspective is Â reinforced by that from a laboratory experiment. Â The laboratory Â experiment avoids measurement errors to which econometric estimation Â is subject concerning omitted or inadequately proxied determinants, Â non-normally distributed errors, inadequate degrees of freedom, false Â assumptions of temporal independence and false synchronicity in Â decision response lags to stimuli. Our laboratory experiment also Â embeds a new theory of exchange rate determination involving the Â uncontroversial power of fully cooperating central banks to totally Â fix the exchange rate. The new model is within a broader theory that Â includes risk effects normally excluded, SKAT, the Stages of Â Knowledge Ahead Theory. We use SKAT to analyse outliers in our Â experimental results, and indicate some new directions and foci for Â econometric work. Â Our laboratory results point to the superiority of Â dollarisation, currency unions, a single world money over even dirty Â floats that include the exchange rate as an objective in its own right.
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