Nonfundamental uncertainty and exchange rates

Robert G. King, Neil Wallace, Warren E. Weber

Research output: Contribution to journalArticlepeer-review

26 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)83-108
Number of pages26
JournalJournal of International Economics
Volume32
Issue number1-2
DOIs
StatePublished - Jan 1 1992

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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