nep-ifn New Economics Papers
on International Finance
Issue of 2008‒03‒08
three papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict By Robin Pope; Reinhard Selten; Sebastian Kube; Johannes Kaiser; Jürgen von Hagen
  2. Beggar Thy Neighbour Exchange Rate Regime Misadvice  from Misapplications of Mundell (1961) and the Remedy By Robin Pope
  3. What drives the current account in commodity exporting countries? The cases of Chile and New Zealand By Juan Pablo Medina; Anella Munro; Claudio Soto

  1. By: Robin Pope; Reinhard Selten; Sebastian Kube; Johannes Kaiser; Jürgen von Hagen
    Abstract: Opinion is divided on whether it is better to have a single world   money or variable exchange rates.  Pope, Selten and von Hagen (2003)   propose that fresh light would be shed via an analysis that allows   for seven complexity impacts on the exchange rate that are   underplayed (where not entirely absent) from current analyses: 1) the   role of official sector, including its central bank; 2) the numerous   official and private sector goals; 3) the disparate degrees of market   power of different sorts of private agents; 4) the documentation that   essentially all shocks to the exchange rate are generated by human   decisions; 5) the non-maximising heuristics that in the complex   economy agents use; 6) heterogenous beliefs.  This paper analyses a   closed form game theoretic solution of version 1 of a model that   combines impacts 1 to 4 with the conventional finance assumption that   all agents maximise their utility.  Impact 1) precludes private   agents being able to destabilise the exchange rate against the   cooperation of the central banks required by the game theoretic   solution.  Impact 4) excludes random events and other exogenous   shocks such as meteors falling from the sky.  The rational maximising   assumption in turn precludes all other sources of shocks and thus any   need for a variable exchange rate to equilibrate after shocks.  We   then modify version 1 of our model substituting for the maximising   assumption impacts 5 to 7, impacts that allow shocks from humans to   be consistently incorporated.  We do so by means of an experimental   investigation which indicates that central bankers less than fully   cooperate, leaving scope for private speculators to support their   preferred currency.  From the viewpoint of the game theoretic   equilibrium, the resultant exchange rate changes render equilibrium   unspecified.  A single world money avoids disruptive exchange rate   changes from less than fully cooperating central banks, exchange rate   changes caused by central bank conflicts and that cannot be   classified as equilibrating.
    Keywords: central bank; cooperation; conflict; exchange rate; experiment; market power; heuristics; heterogenous beliefs; personality; interpersonal dynamics; friendship; complex; destabilising speculators, irrational central bankers
    JEL: F31 F33 B40 B59 C79 C90 C91 C92
    Date: 2007–12
  2. By: Robin Pope
    Abstract: Economists invoke Mundell (1961) in arguing for the general policy of   a flexible exchange rate regime as a means of restoring equilibria   after shocks. But there is a discrepancy between the intent of the   general policy and attempts at its implementation as identified by   specific changes in exchange rates.  When we assemble the set of   specific changes called for by distinct economists operating as   advocates for individual countries, these are uniformly in the form   of beggar-thy-neighbour advice – ie travesties of objectively   identifying disequilibria and a menace to international cooperation   and peace.  This paper traces the unintended travesties to problems   of complexity and uncertainty, problems that implicitly are assumed   absent in Mundell (1961) rendering the situation so simple that   equilibria are transparent.  The problems remained essentially   unaddressed when economists extended Mundell (1961) via expected   utility theory since this theory also ignores the impossibility of   maximising and the complexities of central bankers, private firms and   others in doing the evaluation stage in reaching decisions.  The   problems can be overcome by modelling within SKAT, the Stages of   Knowledge Ahead Theory.  This paper points to experimental evidence   in support of the view that under all sorts of disequilibrating   shocks, currency unions outperform flexible currencies by eliminating   the inefficiencies generated by exchange rate uncertainty.
    Keywords: optimal currency area; exchange rate regime; certainty effects;   policy; beggar-thy-neighbour; SKAT the Stages of Knowledge Ahead Theory; complexity; equilibrium; small world; shocks; expenditure-switching shocks; supply-side shocks; demand shocks; experiment, safety, international competitiveness.
    JEL: D80 F31
    Date: 2007–11
  3. By: Juan Pablo Medina; Anella Munro; Claudio Soto
    Abstract: This paper uses an open economy DSGE model with a commodity sector and nominal and real rigidities to ask what factors account for current account developments in two small commodity exporting countries. We estimate the model, using Bayesian techniques, on Chilean and on New Zealand data, and investigate the structural factors that explain the behaviour of the two countries' current accounts. We find that foreign financial conditions, investment-specific shocks, and foreign demand account for the bulk of the variation of the current accounts of the two countries. In the case of New Zealand fluctuations in commodity export prices have also been important. Monetary and fiscal policy shocks (deviations from policy rules) are estimated to have relatively small e ects on the current account.We find interesting differences in Chilean and New Zealand responses to some shocks, despite similarities between the two economies and the common structural model employed.
    Keywords: current account, commodity price, small open economy, DSGE model
    Date: 2008–02

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