Pope, Robin Selten, Reinhard Kaiser, Johannes von Hagen, Jürgen
Year of Publication:
Bonn Econ Discussion Papers 27/2006
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.
exchange rate regime exchange rate unpredictability experiment SKAT the Stages of Knowledge Ahead Theory variance outlier analysis