Experimental Evidence on the Benefits of Eliminating Exchange Rate Uncertainties and Why Expected Utility Theory Cases Economists to Miss Them (Report‪)‬

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. Our laboratory experiment thus supports those who on this count favour fixed exchange rates, currency unions, even a single money for the entire world.