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Experimental Evidence on the Benefits of Eliminating Exchange Rate Uncertainties and Why Expected Utility Theory causes Economists to Miss Them

Author

Listed:
  • Robin Pope

    ()

  • Reinhard Selten

    ()

  • Sebastian Kube

    ()

  • Jürgen von Hagen

    ()

Abstract

Conclusions favourable to flexible exchange rates typically accord with expected utility theory in ignoring the costs that exchange rate uncertainty generates for governments, central banks, firms and unions in: (i) choosing among available acts; and (ii) existing until learning the outcome of the chosen act. Allowing for these costs involves the stages of knowledge ahead framework, Pope (1983, 1995, 2005). A laboratory experiment suggests that (i) and (ii) together outweigh the advantages of having a flexible exchange rate as an additional instrument for managing a country’s employment, interest rate, price level and international competitiveness goals

Suggested Citation

  • Robin Pope & Reinhard Selten & Sebastian Kube & Jürgen von Hagen, 2006. "Experimental Evidence on the Benefits of Eliminating Exchange Rate Uncertainties and Why Expected Utility Theory causes Economists to Miss Them," Labsi Experimental Economics Laboratory University of Siena 010, University of Siena.
  • Handle: RePEc:usi:labsit:010
    as

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    File URL: http://repec.deps.unisi.it/labsi/labsi_paper/labsi10.pdf
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    References listed on IDEAS

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    1. Cheung, Yin-Wong & Friedman, Daniel, 2009. "Speculative attacks: A laboratory study in continuous time," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 1064-1082, October.
    2. Maurice Obstfeld, 2001. "International Macroeconomics: Beyond the Mundell-Fleming Model," NBER Working Papers 8369, National Bureau of Economic Research, Inc.
    3. Eric Fisher, 2004. "Exploring Elements of Exchange Rate Theory in a Controlled Enivronment," Levine's Bibliography 122247000000000199, UCLA Department of Economics.
    4. Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
    5. Charles N. Noussair & Charles R. Plott & Raymond G. Riezman, 2013. "The Principles of Exchange Rate Determination in an International Finance Experiment," World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 18, pages 329-368 World Scientific Publishing Co. Pte. Ltd..
    6. Malin Adolfson, 1997. "Exchange rate pass-through to Swedish import prices," Finnish Economic Papers, Finnish Economic Association, vol. 10(2), pages 81-98, Autumn.
    7. Dr Peter Kenen, 2002. "Currency Unions and Trade: Variations on Themes by Rose and Persson," Reserve Bank of New Zealand Discussion Paper Series DP2002/08, Reserve Bank of New Zealand.
    8. Fisher, Eric O'N, 2001. "Purchasing Power Parity and Interest Parity in the Laboratory," Australian Economic Papers, Wiley Blackwell, vol. 40(4), pages 586-602, December.
    9. Selten, Reinhard, 1998. "Features of experimentally observed bounded rationality," European Economic Review, Elsevier, vol. 42(3-5), pages 413-436, May.
    10. von Hagen, Jürgen & Zhou, Jizhong, 2004. "The Choice of Exchange Rate Regime in Developing Countries: A Multinational Panel Analysis," CEPR Discussion Papers 4227, C.E.P.R. Discussion Papers.
    11. 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.
    12. Peter B. Kenen, 2001. "International Financial Architecture: What's New? What's Missing?, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 335.
    13. Selten, Reinhard, 1996. "Aspiration Adaptation Theory," Discussion Paper Serie B 389, University of Bonn, Germany.
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    Citations

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    Cited by:

    1. Kimakova, Alena, 2008. "The political economy of exchange rate regime determination: Theory and evidence," Economic Systems, Elsevier, vol. 32(4), pages 354-371, December.
    2. Robin Pope & Reinhard Selten & Johannes Kaiser & Sebastian Kube & Jürgen Hagen, 2012. "Exchange rate determination: a theory of the decisive role of central bank cooperation and conflict," International Economics and Economic Policy, Springer, vol. 9(1), pages 13-51, March.
    3. Robin Pope, 2009. "Beggar-Thy-Neighbour Exchange Rate Regime Misadvice from Misapplications of Mundell (1961 ) and the Remedy," The World Economy, Wiley Blackwell, vol. 32(2), pages 326-350, February.

    More about this item

    Keywords

    experiment;

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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