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Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict

  • Robin Pope
  • Reinhard Selten
  • Sebastian Kube
  • Johannes Kaiser
  • Jürgen von Hagen

    ()

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

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse19_2007.pdf
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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse19_2007.

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Length: 52
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:bon:bonedp:bgse19_2007
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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  1. Allais, Maurice, 1972. "Forgetfulness and Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 4(1), pages 40-73, Part I Fe.
  2. Sordi, Serena & Vercelli, Alessandro, 2006. "Financial fragility and economic fluctuations," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 543-561, December.
  3. 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.
  4. Jeffrey A. Frankel, 1985. "The Dazzling Dollar," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 199-217.
  5. 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.
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  8. 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.
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  10. 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.
  11. 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.
  12. Kilponen, Juha & Leitemo, Kai, 2007. "Discretion and the transmission lags of monetary policy," Research Discussion Papers 8/2007, Bank of Finland.
  13. Harsanyi, John C, 1978. "Bayesian Decision Theory and Utilitarian Ethics," American Economic Review, American Economic Association, vol. 68(2), pages 223-28, May.
  14. 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.
  15. 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.
  16. Lucas Papademos, 2006. "Policy-making in EMU: strategies, rules and discretion," Economic Theory, Springer, vol. 27(1), pages 25-38, 01.
  17. 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.
  18. Bonpasse, Morrison, 2006. "The Single Global Currency: Common Cents for the World," MPRA Paper 1175, University Library of Munich, Germany.
  19. 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.
  20. 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.
  21. Borch, Karl, 1969. "A Note on Uncertainty and Indifference Curves," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 1-4, January.
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