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on International Finance |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse18_2007&r=ifn |
| 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; Â 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 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse1_2007&r=ifn |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:247&r=ifn |