The Principles of Exchange Rate Determination in an International Finance Experiment

Charles Noussair, Charles Plott () and Raymond Riezman

Chapter 18 in International Trade Agreements and Political Economy, 2013, pp 329-368 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper reports the first experiments designed to explore the behavior of economies with prominent features of international finance. Two "countries," each with its own currency, were created. International trade could take place only through the operation of markets for currency. The law of one price and the flow of funds theory of exchange rate determination were used to produce general equilibrium models that captured much of the behavior of the economies. Prices of goods, as well as the exchange rate, evolve over time toward the predictions of the models. However, both the law of one price and purchasing power parity can be rejected for reasons that do not appear in the literature. Pattems of international trade were as predicted by the law of comparative advantage.

Keywords: International Trade; Political Economy; Theory of International Free Trade Agreements; Customs Unions; Tariff Dynamics; Storable Votes (search for similar items in EconPapers)
Date: 2013
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Related works:
Working Paper: The Principles of Exchange Rate Determination in an International Finance Experiment (1995)
Working Paper: The Principales of Exchange Rate Determination in an international Finance Experiment (1994)
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