TY - JOUR
T1 - Nonfundamental uncertainty and exchange rates
AU - King, Robert G.
AU - Wallace, Neil
AU - Weber, Warren E.
N1 - Funding Information:
*This research was undertaken in connection with the Sloan Foundation grant to the University of Minnesota for the study of macroeconomic policy coordination. Earlier versions of this paper were presented at the Third Liverpool Macroeconomic Workshop, March 1987; the Federal Reserve System Committee on Financial Analysis, April 1987; the Santa Barbara Conference on Monetary Theory, May 1987; and at several seminars. We are indebted to participants for helpful comments and, in particular, wish to thank Steve LeRoy, Albert Marcet, Alan Stockman, and Carl Walsh. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
PY - 1992/2
Y1 - 1992/2
N2 - This paper shows that there can be equilibria in which exchange rates display randomness unrelated to fundamentals. This is demonstrated in the context of a two-currency, one-good model, with three agent types and cash-in-advance constraints. A crucial feature is that the type i agents, for i = 1, 2, must satisfy a cash-in-advance constraint by holding currency i, while type 3 agents can satisfy it by holding either currency. It is shown that real allocations vary across the multiple equilibria if markets for hedging exchange risk do not exist and that the randomness is innocuous if complete markets exist.
AB - This paper shows that there can be equilibria in which exchange rates display randomness unrelated to fundamentals. This is demonstrated in the context of a two-currency, one-good model, with three agent types and cash-in-advance constraints. A crucial feature is that the type i agents, for i = 1, 2, must satisfy a cash-in-advance constraint by holding currency i, while type 3 agents can satisfy it by holding either currency. It is shown that real allocations vary across the multiple equilibria if markets for hedging exchange risk do not exist and that the randomness is innocuous if complete markets exist.
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U2 - 10.1016/0022-1996(92)90037-K
DO - 10.1016/0022-1996(92)90037-K
M3 - Article
AN - SCOPUS:0037822346
SN - 0022-1996
VL - 32
SP - 83
EP - 108
JO - Journal of International Economics
JF - Journal of International Economics
IS - 1-2
ER -