On the indeterminacy of equilibrium exchange rates

John H Kareken, Neil Wallace

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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.

Original languageEnglish (US)
Pages (from-to)207-222
Number of pages16
JournalQuarterly Journal of Economics
Issue number2
StatePublished - May 1981

Bibliographical note

Funding Information:
apolis and to the National Science Foundation under grant SOC 77-22743 to the University of Minnesota. The views expressed do not necessarily represent those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. This paper is a shortened version of Kareken and Wallace [1978a]. Less formal presentations of the main idea appear in Kareken and Wallace [1978b), Boyer [1978], and Wallace [1979).


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