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The Principales of Exchange Rate Determination in an international Finance Experiment

AbstractThis 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. The law of one price and the flow of funds theory of exchange rate determination were used to produce general equilibrium models that captured much of the behavior of the economies. Prices of goods, as well as the exchange rate, evolve over time toward the predictions of the models. However, both the law of one price and purchasing power parity can be rejected for reasons that do not appear in the literature. Pattems of international trade were as predicted by the law of comparative advantage.

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Paper provided by Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER) in its series Papers with number 94-021.

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Length: 23 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:fth:purkib:94-021
Contact details of provider: Postal: Purdue University, Center for International Business Education and Research, Krannert Graduate School of Management, 1310 Krannert Building West Lafayette, Indiana 47907-1310.
Web page: http://www.krannert.purdue.edu/

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