Welfare and excess volatility of exchange rates

Salto, Matteo ; Pietra, Tito (2011) Welfare and excess volatility of exchange rates. Bologna: Dipartimento di Scienze economiche DSE, p. 34. DOI 10.6092/unibo/amsacta/4483. In: Quaderni - Working Paper DSE (758). ISSN 2282-6483.
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Abstract

We study the properties of a GEI model with nominal assets, outside money (injected into the economy as in Magill and Quinzii), and multiple currencies. We analyze the existence of monetary equilibria and the structure of the equilibrium set under two different assumptions on the determination of the exchange rates. If currencies are perfect substitutes, equilibrium allocations are indeterminate and, generically, sunspot equilibria exist. Generically, given a nonsunspot equilibrium, there are Pareto improving (and Pareto worsening) sunspot equilibria associated with an increase in the volatility of the future exchange rates. We interpret this property as showing that, in general, there is no clear-cut effect on welfare of the excess volatility of exchange rates, even when due to purely extrinsic phenomena.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Salto, Matteo
Pietra, Tito
Keywords
Incomplete markets, exchange rates, real indeterminacy, sunspots, Pareto efficiency
Subjects
ISSN
2282-6483
DOI
Deposit date
28 Jan 2016 11:40
Last modified
28 Jan 2016 11:40
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