This paper’s field evidence is: (1) these shocks were caused by a clean floats policy of central banks targetting domestic inflation; and (2) the 2006-2008/9 shock would have been more drastic but for the unplanned emergence of the central bank currency swaps when firms holding foreign currency pestered the US Federal Reserve Board to furnish them USD. In orchestrating these swaps, the US Federal Reserve Board had no goal to stabilize exchange rates, even if it can be inferred to prefer stable exchange rates. It merely recognized the urgency of supplying more USD when firms could no longer roll over their USD denominated debts.
The paper’s field evidence is bolstered by that from a laboratory experiment that incorporates more aspects of real world complexity and more different sorts of official and private sector agents (treasury officials, central bankers speculators, hedgers, wage setters) than are feasible in econometric and algebraic investigations. The laboratory experiment employs a new central bank cooperation-conflict model of exchange rate determination. This model has a game theoretic benchmark. It moreover puts centre stage the routinely ignored power of two fully cooperating central banks to determine their bilateral exchange rate and how central bank conflict alters exchange rates. This model is within an umbrella theory SKAT, the Stages of Knowledge Ahead Theory. SKAT allows for risk effects from stages omitted in normal exchange rate models, including those from (a) difficulties of agents in evaluating alternatives in a complex environment in which the routinely assumed maximization of expected utility is impossible; and (b) preference for safety and reliability is not trivialized to denote the concavity of the as if certain utility of money function as under expected utility theory.
Our joint field plus laboratory evidence indicates that official sectors should maintain an international exchange rate oriented perspective, or better yet, a single world currency. Official sectors should not rapidly forget the damage of the 1982-85 exchange rate liquidity crisis as occurred for numerous currencies in the early 1990s, and re-implement the closed economy clean floats perspective. To avoid rapid forgetting, a new syllabus, as under the SKAT umbrella, is fundamental in the education of official sector members in order to furnish them with a persuasive coherent alternative intellectual framework to current mainstream university education in economics and finance that excludes liquidity crises.