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Welfare and excess volatility of exchange rates

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  • M. Salto
  • T. Pietra

Abstract

We study the properties of a GEI model with nominal assets, outside money (injected into the economy as in Magill and Quinzii (J Math Econ 21:301–342, 1992 )), 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. Copyright Springer-Verlag 2013

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  • M. Salto & T. Pietra, 2013. "Welfare and excess volatility of exchange rates," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 501-529, March.
    • Handle: RePEc:spr:joecth:v:52:y:2013:i:2:p:501-529
    DOI: 10.1007/s00199-011-0654-2
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    Cited by:

    1. Sara Eugeni, 2019. "Exchange rate volatility and cooperation in an incomplete markets' economy," Department of Economics Working Papers 2019_02, Durham University, Department of Economics.
    2. M. Salto & T. Pietra, 2013. "Welfare and excess volatility of exchange rates," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 501-529, March.
    3. Mendolicchio, C. & Pietra, T., 2019. "A re-examination of constrained Pareto inefficiency in economies with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 80(C), pages 39-55.
    4. Mendolicchio, C. & Pietra, T., 2016. "Endowment redistribution and Pareto improvements in GEI economies," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 181-190.
    5. Alexandre Cunha, 2013. "On the relevance of floating exchange rate policies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(2), pages 357-382, June.
    6. Mauro Bambi & Sara Eugeni, 2021. "Nominal exchange rate determination and dynamics in an OLG framework," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 93-132, July.

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    More about this item

    Keywords

    Incomplete markets; Exchange rates; Real indeterminacy; Sunspots; Efficiency; D52;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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