The Principles of Exchange Rate Determination in an International Finance Experiment

JOURNAL OF POLITICAL ECONOMY, Vol. 105, No. 4, August 1997

Posted: 16 Oct 1997

See all articles by Charles N. Noussair

Charles N. Noussair

Tilburg University

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences

Raymond G. Riezman

University of Iowa - Henry B. Tippie College of Business - Department of Economics; Aarhus University - Department of Economics and Business; University of California, Santa Barbara (UCSB) - Department of Economics; GEP; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

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.

JEL Classification: F31

Suggested Citation

Noussair, Charles N. and Plott, Charles R. and Riezman, Raymond G., The Principles of Exchange Rate Determination in an International Finance Experiment. JOURNAL OF POLITICAL ECONOMY, Vol. 105, No. 4, August 1997. Available at SSRN: https://ssrn.com/abstract=10930

Charles N. Noussair

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Charles R. Plott (Contact Author)

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
337 Baxter Hall
Pasadena, CA 91125
United States
626-395-4209 (Phone)

Raymond G. Riezman

University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )

316 PBB
Iowa City, IA 52242
United States

HOME PAGE: http://www.biz.uiowa.edu/faculty/rriezman/

Aarhus University - Department of Economics and Business ( email )

Fuglesangs Alle 4
Aarus, 8210
Denmark

HOME PAGE: http://www.biz.uiowa.edu/faculty/rriezman/

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States

GEP ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,295
PlumX Metrics