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Policy Signaling in the Open Economy: A Re-Examination

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  • Allan Drazen

Abstract

The 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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5892.

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Date of creation: Jan 1997
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Publication status: published as Wolf, H. (ed.) Contemporary Economic Development Reviewed, vol. 5, Macroeconomic Policy and Financial Systems. London: Macmillan, 1997.
Handle: RePEc:nbr:nberwo:5892

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  1. Maurice Obstfeld., 1996. "Destabilizing Effects of Exchange-Rate Escape Clauses," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C96-075, University of California at Berkeley.
  2. Liviatan, Nissan, 1984. "Tight money and inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 13(1), pages 5-15, January.
  3. Paul R. Masson & Allan Drazen, 1994. "Credibility of Policies Versus Credibility of Policymakers," IMF Working Papers 94/49, International Monetary Fund.
  4. Blanchard, Olivier J., 1985. "Credibility, disinflation and gradualism," Economics Letters, Elsevier, Elsevier, vol. 17(3), pages 211-217.
  5. Leonardo Bartolini & Allan Drazen, 1996. "Capital account liberalization as a signal," Staff Reports, Federal Reserve Bank of New York 11, Federal Reserve Bank of New York.
  6. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
  7. Giavazzi, Francesco & Spaventa, Luigi, 1990. "The `New' EMS," CEPR Discussion Papers, C.E.P.R. Discussion Papers 369, C.E.P.R. Discussion Papers.
    • Francesco Giavazzi & Luigi Spaventa, 1990. "The "New" EMS," Working Papers 86, Dipartimento Scienze Economiche, Universita' di Bologna.
  8. Persson, Torsten, 1988. "An introduction and a broad survey," European Economic Review, Elsevier, Elsevier, vol. 32(2-3), pages 519-532, March.
  9. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262061414, December.
  10. Rogoff, Kenneth, 1987. "Reputational constraints on monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 26(1), pages 141-181, January.
  11. Dooley, Michael P & Isard, Peter, 1980. "Capital Controls, Political Risk, and Deviations from Interest-Rate Parity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(2), pages 370-84, April.
  12. Drazen, Allan, 1985. "Tight money and inflation: Further Results," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(1), pages 113-120, January.
  13. Frank Hahn, 1985. "Money and Inflation," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262580624, December.
  14. Susanne Lohmann, 1990. "Monetary Policy Strategies: A Correction: Comment on Flood and Isard," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 440-445, June.
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Cited by:
  1. David M. Gould, 1999. "Does the choice of nominal anchor matter?," Center for Latin America Working Papers, Federal Reserve Bank of Dallas 0499, Federal Reserve Bank of Dallas.
  2. Fabrizio Carmignani & Emilio Colombo & Patrizio Tirelli, 2005. "Consistency versus credibility: how do countries choose their exchange rate regime?," International Finance, EconWPA 0502001, EconWPA.
  3. Carmignani, Fabrizio & Colombo, Emilio & Tirelli, Patrizio, 2008. "Exploring different views of exchange rate regime choice," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(7), pages 1177-1197, November.
  4. Reuven Glick & Michael Hutchison, . "Stopping "Hot Money" or Signaling Bad Policy? Capital Controls and the Onset of Currency Crises," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 00-14, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.

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