Welfare and excess volatility of exchange rates

Matteo Salto and Tito Pietra

Economic Theory, 2013, vol. 52, issue 2, 529 pages

Abstract: We study the properties of a GEI model with nominal assets, outside money (injected into the economy as in Magill and Quinzii (J Math Econ 21:301–342, 1992 )), and multiple currencies. We analyze the existence of monetary equilibria and the structure of the equilibrium set under two different assumptions on the determination of the exchange rates. If currencies are perfect substitutes, equilibrium allocations are indeterminate and, generically, sunspot equilibria exist. Generically, given a nonsunspot equilibrium, there are Pareto improving (and Pareto worsening) sunspot equilibria associated with an increase in the volatility of the future exchange rates. We interpret this property as showing that, in general, there is no clear-cut effect on welfare of the excess volatility of exchange rates, even when due to purely extrinsic phenomena. Copyright Springer-Verlag 2013

Keywords: Incomplete markets; Exchange rates; Real indeterminacy; Sunspots; Efficiency; D52 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Working Paper: Welfare and excess volatility of exchange rates (2011)
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DOI: 10.1007/s00199-011-0654-2

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