Quasi-fundamental exchange rate variation |
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Authors: | Steven Russell |
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Institution: | (1) Department of Economics, IUPUI, Indianapolis, IN 46202-5140, USA (e-mail: shrusse@iupui.edu) , US |
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Abstract: | Summary. This paper uses a general equilibrium model to study the determination of the exchange rate in an economy with fundamental
uncertainty. The model has steady state equilibria in which the exchange rate is constant. These equilibria may coexist with
“quasi-fundamental” equilibria – nonstationary equilibria in which the exchange rate displays stochastic fluctuations that
are correlated with the fluctuations in fundamental random variables. The quasi-fundamental equilibria are Pareto dominated
by the corresponding constant-exchange-rate steady states. They also converge to these steady states, inevitably or with positive
probability.
Received: October 2, 1999; revised version: March 26, 2002
RID="*"
ID="*" This paper began as a joint project with Alex Mourmouras, who has made many helpful comments and suggestions but is
not responsible for any errors or deficiencies. In addition, I thank an anonymous referee for helpful comments. |
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Keywords: | and Phrases: Exchange rates Excessive volatility Sunspot equilibria |
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