Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict

Robin Pope, Reinhard Selten, Sebastian Kube, Johannes Kaiser () and Juergen von Hagen ()

Bonn Econ Discussion Papers from University of Bonn, Germany

Abstract: 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.

Keywords: 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. (search for similar items in EconPapers)
JEL-codes: D80 F31 (search for similar items in EconPapers)
Date: 2007-11

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Related works:
Working Paper: Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:bon:bonedp:bgse19_2007

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