The Principles of Exchange Rate Determination in an International Finance Experiment

Bibliographic Data

ID10173293
AuthorsCharles Noussair (0000-0001-5348-4414, Purdue University West Lafayette), Charles N Noussair, Charles R Plott (0000-0001-8363-3628, California Institute of Technology), Raymond Riezman (University of Iowa), Raymond G Riezman
Year1997
Volume105
Issue4
Pages822-861
Publication date1997-08-01
Peer ReviewedYes
Open AccessNo
TypeARTICLE
VenueJournal of Political Economy (JOURNAL)
Journal identifiersISSN: 0022-3808 • E-ISSN: 1537-534X
PublisherUniversity of Chicago Press (PUBLISHER • US)
DOI10.1086/262095
OpenAlexW2108658800
LanguageEN
Citations received5
References cited2

This paper reports the first experiments designed to explore the behavior of economies with prominent features of international finance. Two “countries,” each with its own currency, were created. International trade could take place only through the operation of markets for currency. The law of one price and the flow of funds theory of exchange rate determination were used to produce general equilibrium models that captured much of the behavior of the economies. Prices of goods, as well as the exchange rate, evolve over time toward the predictions of the models. However, both the law of one price and purchasing power parity can be rejected for reasons that do not appear in the literature. Patterns of international trade were as predicted by the law of comparative advantage

Currency · Economics · Exchange rate · Interest rate parity · International economics · International finance · Law of one price · Macroeconomics · Mid price · Monetary economics · Price level · Purchasing power · Purchasing power parity · Complex Systems and Time Series Analysis · Economic theories and models · Monetary Policy and Economic Impact

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