Equilibrium Exchange Rate Policies: Complicit Renegotiation-Proof Outcomes

Pierre Mella-Barral and Paolo Vitale

Working Papers from HAL

Abstract: Countries can repeatedly and opportunistically renegotiate the terms of agreements to which they can only complicitly assent. Therefore, when attempting to coordinate exchange rate policies, they continuously play partnership games. We develop a reduced form model of exchange rate management where, as a starting point, (a) sequences of discrete realignments and (b) shared intervention are desirable. We show that the implementation of the ex-ante optimal policy suffers from severe time-inconsistencies. We analyse the Stackelberg equilibria of the stochastic differential game played by partner countries. We find that equilibrium complicit renegotiation-proof policies are supported by net cross-country wealth transfers from the weaker to the stronger bargaining power country. Our theoretical results provide a game-theoretic interpretation of the evolution of monetary arrangements in Europe and the emergence of EMU.

Keywords: Bargaining Power; Cross-Country Wealth Transfers; Exchange Rate Management; Renegotiation (search for similar items in EconPapers)
Date: 2002
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Published in 2002

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Working Paper: EQUILIBRIUM EXCHANGE RATE POLICIES: COMPLICIT RENEGOTIATION-PROOF OUTCOMES (2002)
Working Paper: Equilibrium Exchange Rate Policies: Complicit Renegotiation-Proof Outcomes (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-00597776

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