The paper traces the dangers in the closed economy perspective of a  monetary policy focused on a domestic inflation goal under a clean  float.  Field evidence of the damage wrought from this perspective is  reinforced by that from a laboratory experiment.  The laboratory  experiment avoids measurement errors to which econometric estimation  is subject concerning omitted or inadequately proxied determinants,  non-normally distributed errors, inadequate degrees of freedom, false  assumptions of temporal independence and false synchronicity in  decision response lags to stimuli. Our laboratory experiment also  embeds a new theory of exchange rate determination involving the  uncontroversial power of fully cooperating central banks to totally  fix the exchange rate. The new model is within a broader theory that  includes risk effects normally excluded, SKAT, the Stages of  Knowledge Ahead Theory. We use SKAT to analyse outliers in our  experimental results, and indicate some new directions and foci for  econometric work.  Our laboratory results point to the superiority of  dollarisation, currency unions, a single world money over even dirty  floats that include the exchange rate as an objective in its own right.
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Publisher Info
Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number
bgse19_2007.
Length: 52 Date of creation: Nov 2007 Date of revision: Handle: RePEc:bon:bonedp:bgse19_2007
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany Fax: +49 228 73 9221 Web page: http://www.bgse.uni-bonn.de/index.php?id=494
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