Abstract
In this paper a model is presented to analyze the influence of exchange rate uncertainty under imperfect market conditions. We consider an oligopolistic market with two types of producers: home producers and foreign producers, both supplying the home market. The exchange rate influences the profits of the foreign producers, and therefore, determines foreign market supply. Through the common demand equation and the game-theoretical setting, this foreign supply affects the home producers.
By assuming profit maximization and allowing the exchange rate to follow an Ito diffusion process, we end up with a stochastic control problem. The closed loop solution of the control problem can be derived by means of the Hamilton-Jacobian-Bellman equation of stochastic control, resulting in one or more partial differential equations (PDEs). As most PDEs are difficult to solve analytically, we apply a simulation approach to investigate the characteristics of our model.
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© 1992 Springer Science+Business Media Dordrecht
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Amman, H.M., van Velden, L.M.T. (1992). Exchange Rate Uncertainty in Imperfect Markets: A Simulation Approach. In: Amman, H.M., Belsley, D.A., Pau, L.F. (eds) Computational Economics and Econometrics. Advanced Studies in Theoretical and Applied Econometrics, vol 22. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-3162-9_10
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DOI: https://doi.org/10.1007/978-94-011-3162-9_10
Publisher Name: Springer, Dordrecht
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