Imperfect Competition, the State Game and Exchange Rate Formation Mechanism

Scholars and policy makers have concerned about the problem of the exchange rate determining mechanism. Whether the traditional or the modern exchange rate theory, the perfect competition is implied when analyzing the exchange rate determining mechanism. Although the imperfect competition and the state game have been played an important role in the exchange rate determining mechanism, the scholars are rarely to research about it specially. This study amends on the assumption of perfect competition, and introduce the imperfect competition to study exchange rate formation mechanism by the game theory. The paper analyzes how the exchange rate is determined when the market is monopoly, or the agents are the limited cooperative or the cooperative respectively. The study also discussed how the exchange rate determining mechanism effects on the social welfare. The conclusions are that the monopoly market can achieve the Pareto optimum during determining the exchange rate level, and that the cooperative game is superior to the limited cooperative game when the exchange rate is determined between two states. The cooperative game between two states can also achieve Pareto optimality.