English, Article, Journal or magazine article edition: Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict Robin Pope; Reinhard Selten; Sebastian Kube; ...

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict
Author
  • Robin Pope
  • Reinhard Selten
  • Sebastian Kube
  • Johannes Kaiser
  • Jürgen von Hagen
Physical Description
  • preprint
Notes
  • The paper traces the dangers in the closed economy perspective of a   monetary policy focused on a domestic inflation goal under a clean   float.  Field evidence of the damage wrought from this perspective is   reinforced by that from a laboratory experiment.  The laboratory   experiment avoids measurement errors to which econometric estimation   is subject concerning omitted or inadequately proxied determinants,   non-normally distributed errors, inadequate degrees of freedom, false   assumptions of temporal independence and false synchronicity in   decision response lags to stimuli. Our laboratory experiment also   embeds a new theory of exchange rate determination involving the   uncontroversial power of fully cooperating central banks to totally   fix the exchange rate. The new model is within a broader theory that   includes risk effects normally excluded, SKAT, the Stages of   Knowledge Ahead Theory. We use SKAT to analyse outliers in our   experimental results, and indicate some new directions and foci for   econometric work.  Our laboratory results point to the superiority of   dollarisation, currency unions, a single world money over even dirty   floats that include the exchange rate as an objective in its own right.
  • outliers analysis, clean float, dirty float, IMF, exchange rate regime, exchange rate volatility, experiment, SKAT the Stages of Knowledge Ahead Theory, monetary policy, transparent policy, exchange rate shocks, central bank cooperation, central bank conflict; beggar thy neighbor.
  • RePEc:bon:bonedp:bgse19_2007
  • 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.
  • central bank; cooperation; conflict; exchange rate; experiment; market power; heuristics; heterogenous beliefs; personality; interpersonal dynamics; friendship; complex; destabilising speculators, irrational central bankers
  • RePEc:bon:bonedp:bgse18_2007
Language
  • English
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