Template-Type: ReDIF-Paper 1.0
Title: Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict
Author-Name: Robin Pope
Author-Name: Reinhard Selten
Author-Name: Sebastian Kube
Author-Name: Johannes Kaiser
Author-Name: Jürgen von Hagen
Author-Email: robin.pope@uni-bonn.de
Classification-JEL: F310, F330, B400, B590, C790, C900, C910, C920
Keywords: central bank; cooperation; conflict; exchange rate; experiment; market power; heuristics; heterogenous beliefs; personality; interpersonal dynamics; friendship; complex; destabilising speculators, irrational central bankers
Abstract: Opinion is divided on whether it is better to have a single world  
	money or variable exchange rates.  Pope, Selten and von Hagen (2003)  
	propose that fresh light would be shed via an analysis that allows  
	for seven complexity impacts on the exchange rate that are  
	underplayed (where not entirely absent) from current analyses: 1) the  
	role of official sector, including its central bank; 2) the numerous  
	official and private sector goals; 3) the disparate degrees of market  
	power of different sorts of private agents; 4) the documentation that  
	essentially all shocks to the exchange rate are generated by human  
	decisions; 5) the non-maximising heuristics that in the complex  
	economy agents use; 6) heterogenous beliefs.  This paper analyses a  
	closed form game theoretic solution of version 1 of a model that  
	combines impacts 1 to 4 with the conventional finance assumption that  
	all agents maximise their utility.  Impact 1) precludes private  
	agents being able to destabilise the exchange rate against the  
	cooperation of the central banks required by the game theoretic  
	solution.  Impact 4) excludes random events and other exogenous  
	shocks such as meteors falling from the sky.  The rational maximising  
	assumption in turn precludes all other sources of shocks and thus any  
	need for a variable exchange rate to equilibrate after shocks.  We  
	then modify version 1 of our model substituting for the maximising  
	assumption impacts 5 to 7, impacts that allow shocks from humans to  
	be consistently incorporated.  We do so by means of an experimental  
	investigation which indicates that central bankers less than fully  
	cooperate, leaving scope for private speculators to support their  
	preferred currency.  From the viewpoint of the game theoretic  
	equilibrium, the resultant exchange rate changes render equilibrium  
	unspecified.  A single world money avoids disruptive exchange rate  
	changes from less than fully cooperating central banks, exchange rate  
	changes caused by central bank conflicts and that cannot be  
	classified as equilibrating.
Note: 
Length: 33
Creation-Date: 2007-12
Revision-Date: 
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse18_2007.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse18_2007