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The Principles of Exchange Rate Determination in an International Finance Experiment

Noussair, Charles N. and Plott, Charles R. and Riezman, Raymond G. (1997) The Principles of Exchange Rate Determination in an International Finance Experiment. Journal of Political Economy, 105 (4). pp. 822-861. ISSN 0022-3808.

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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.

Item Type:Article
Additional Information:Copyright © 1997. University of Chicago Press. We wish to acknowledge the financial support of the National Science Foundation and the Caltech Laboratory for Experimental Economics and Political Science. The cooperation of the Center for Research in Experimental Economics and Political Decision-Making at the University of Amsterdam was important for the conduct of experiments in Amsterdam. We also wish to thank Mark Olson for his assistance with the Amsterdam experiments. The help of Hsing-Yang Lee with the electronic market programs made the study possible. An earlier version of this paper was presented at the Allied Social Sciences Association annual meetings in January 1994. We thank Marianne Baxter for her helpful suggestions as discussant of the paper, and Lars Peter Hansen for his helpful suggestions.
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Deposited On:17 Apr 2008
Last Modified:24 Mar 2014 22:31

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