IJEB
June_2008 Issue: Vol 7. No. 1.
Article: Experimental
Evidence on the Benefits of Eliminating Exchange Rate Uncertainties
and Why Expected Utility Theory causes Economists to Miss Them
Robin Pope, Reinhard Selten, Sebastian Kube and Jürgen von
Hagen
Abstract: Conclusions favorable
to flexible exchange rates typically accord with expected utility
theory in ignoring the costs that exchange rate uncertainty generates
for governments, central banks, firms and unions in various knowledge
stages that occur between identifying a problem and learning the
outcome of the responding decision. Allowing for these involves
SKAT, the Stages of Knowledge Ahead Theory, Pope (1983, 1995,
2005), Pope,Leitner and Leopold (2006). One of these costly stages
in the complex real world is that of evaluating alternatives.
The complexity precludes the maximising choices that, explicitly
or implicitly, underlie arguments for flexible exchange rates.
A laboratory experiment suggests that the complexity costs outweigh
the advantages of having a flexible exchange rate as an additional
instrument for managing a country’s international competitiveness
goal.