Pope, Robin Selten, Reinhard Kaiser, Johannes Kube, Sebastian von Hagen, Jürgen
Year of Publication:
Bonn econ discussion papers 2007,19
The paper traces the dangers in the closed economy perspective of a monetary policy focused on adomestic inflation goal under a clean float. Field evidence of the damage wrought from this perspective isreinforced by that from a laboratory experiment. The laboratory experiment avoids measurement errors towhich econometric estimation is subject concerning omitted or inadequately proxied determinants, nonnormallydistributed errors, inadequate degrees of freedom, false assumptions of temporal independenceand false synchronicity in decision response lags to stimuli. Our laboratory experiment also embeds a newtheory of exchange rate determination involving the uncontroversial power of fully cooperating centralbanks to totally fix the exchange rate. The new model is within a broader theory that includes risk effectsnormally excluded, SKAT, the Stages of Knowledge Ahead Theory. We use SKAT to analyse outliers inour experimental results, and indicate some new directions and foci for econometric work. Our laboratoryresults point to the superiority of dollarisation, currency unions, a single world money over even dirtyfloats that include the exchange rate as an objective in its own right.
outliers analysis clean float dirty float IMF exchange rate regime exchange rate volatility experiment SKAT the Stages of Knowledge Ahead Theory monetary policy transparent policy exchange rate shocks central bank cooperation central bank conflict beggar thy neighbor