Policy Signaling in the Open Economy: A Re-Examination
AbstractThe standard model of signaling used in open economy macroeconomics concentrates on building a reputation when a policymaker's `type' is unknown. Observing tough policy leads market participants to raise the probability that a policymaker is tough, and therefore to expect tough policy in the future. This approach leaves unexplained a number of commonly observed occurrences, for example, toughness in defending an exchange rate leading to increased speculation against the currency. To explain many phenomena, this paper argues, more sophisticated signaling models are needed, models which include signaling of resources rather than preferences, policy affecting the environment in which signals are sent, and exogenous changes in the environment affecting the informativeness of signals. These models are explored and are shown to be able to explain a number of phenomena the standard reputational model cannot.
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Date of creation: Jan 1997
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Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
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