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

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  • von Hagen, Jürgen
  • Kube, Sebastian
  • Selten, Reinhard
  • Pope, Robin

Abstract

Conclusions favorable 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 acts; and (ii) existing until learning the outcome of the chosen act. Allowing for these involves SKAT, the Stages of Knowledge Ahead Theory, Pope (1983, 1995, 2005), Pope, Leitner and Leopold (2006). 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 international competitiveness goal.

Suggested Citation

  • von Hagen, Jürgen & Kube, Sebastian & Selten, Reinhard & Pope, Robin, 2006. "Experimental Evidence on the Benefits of Eliminating Exchange Rate Uncertainties and Why Expected Utility Theory causes Economists to Miss Them," Bonn Econ Discussion Papers 28/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    • Handle: RePEc:zbw:bonedp:282006
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    References listed on IDEAS

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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. Pope, Robin & Selten, Reinhard & Kube, Sebastian & Kaiser, Johannes & von Hagen, Jürgen, 2007. "Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict," Bonn Econ Discussion Papers 18/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).
    4. 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.

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    More about this item

    Keywords

    exchange rate regime; exchange rate uncertainties; currency union; macro-economic instruments; experiment; SKAT;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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