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On the Indeterminacy of Equilibrium Exchange Rates

John Kareken^1,2; Neil Wallace^1,2

¹ University of Minnesota · ² University of Minnesota System

In this paper we consider a particular international economic policy regime: the laissez-faire regime, the distinguishing features of which are unrestricted portfolio choice and floating exchange rates. And as we show, this regime, although favored by many economists, is not economically feasible. It does not have a determinate equilibrium. That is an implication of an overlapping-generations model. More basically, it is an implication of the notion that money is wanted only in order to accomplish trades.

DOI

10.2307/1882388

Volume

96 (2)

Pages

207

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