The Underlying Cause of Unpredictability in Exchange Rates and Good Models of Exchange Rate Regime Selection: Field and Laboratory Evidence

Robin Pope, Reinhard Selten, Johannes Kaiser and Juergen von Hagen

No 27/2006, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: Variance of exchange rates around predictions can be from 1) undiscovered fundamentals, 2) efficient markets, 3) destabilising speculation, or 4) regime and personality differences in the heuristics used in the stage of evaluating alternatives. Field and experimental evidence identifies 4) as the underlying cause. Variance effects prior to the resolution of risk damage macroeconomic management but are excluded by expected utility theory wherein utilities attach only to the segment of the outcome flow after risk is passed. To include the evaluation stage and such damage from variance, the authorities can use models within SKAT, the Stages of Knowledge Ahead Theory.

Keywords: exchange rate regime; exchange rate unpredictability; experiment; SKAT the Stages of Knowledge Ahead Theory; variance; outlier analysis (search for similar items in EconPapers)
JEL-codes: D80 D81 F31 F33 (search for similar items in EconPapers)
Date: 2006
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