Template-Type: ReDIF-Paper 1.0
Title: Beggar Thy Neighbour Exchange Rate Regime Misadvice  from Misapplications of Mundell (1961) and the Remedy
Author-Name: Robin Pope
Author-Email: robin.pope@uni-bonn.de
Classification-JEL: D80, F31
Keywords: optimal currency area; exchange rate regime; certainty effects;  
policy; beggar-thy-neighbour; SKAT the Stages of Knowledge Ahead Theory; complexity; equilibrium; small world; shocks; expenditure-switching shocks; supply-side shocks; demand shocks; experiment, safety, international competitiveness.
Abstract: Economists invoke Mundell (1961) in arguing for the general policy of  
	a flexible exchange rate regime as a means of restoring equilibria  
	after shocks. But there is a discrepancy between the intent of the  
	general policy and attempts at its implementation as identified by  
	specific changes in exchange rates.  When we assemble the set of  
	specific changes called for by distinct economists operating as  
	advocates for individual countries, these are uniformly in the form  
	of beggar-thy-neighbour advice – ie travesties of objectively  
	identifying disequilibria and a menace to international cooperation  
	and peace.  This paper traces the unintended travesties to problems  
	of complexity and uncertainty, problems that implicitly are assumed  
	absent in Mundell (1961) rendering the situation so simple that  
	equilibria are transparent.  The problems remained essentially  
	unaddressed when economists extended Mundell (1961) via expected  
	utility theory since this theory also ignores the impossibility of  
	maximising and the complexities of central bankers, private firms and  
	others in doing the evaluation stage in reaching decisions.  The  
	problems can be overcome by modelling within SKAT, the Stages of  
	Knowledge Ahead Theory.  This paper points to experimental evidence  
	in support of the view that under all sorts of disequilibrating  
	shocks, currency unions outperform flexible currencies by eliminating  
	the inefficiencies generated by exchange rate uncertainty.
Note: 
Length: 26
Creation-Date: 2007-01
Revision-Date: 2007-11
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse1_2007.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse1_2007