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Welfare Effects of Transparency in Foreign Exchange Markets: the Role of Hedging Opportunities

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  • Burkhard Drees
  • Bernhard Eckwert

Abstract

The paper studies the impact of more transparency on the risk-sharing opportunities in the foreign exchange market and the associated implications on ex ante welfare. Transparency is measured in this model by the informational content of publicly observable signals about exchange rate developments. The authors find that in this model more transparency improves welfare in economies that are poorly endowed with capital and/or where investors are not very risk-averse, while welfare is reduced in economies with large capital endowments and/or where investors are highly risk-averse. Copyright Blackwell Publishing Ltd 2003.

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  • Burkhard Drees & Bernhard Eckwert, 2003. "Welfare Effects of Transparency in Foreign Exchange Markets: the Role of Hedging Opportunities," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 453-463, August.
  • Handle: RePEc:bla:reviec:v:11:y:2003:i:3:p:453-463
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    References listed on IDEAS

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    1. Sanford J. Grossman & Richard E. Kihlstrom & Leonard J. Mirman, 1977. "A Bayesian Approach to the Production of Information and Learning By Doing," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 533-547.
    2. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, pages 246-253.
    3. Eyal Sulganik & Itzhak Zilcha, 1996. "The value of information in the presence of futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(2), pages 227-240, April.
    4. Orosel, Gerhard O., 1996. "Informational efficiency and welfare in the stock market," European Economic Review, Elsevier, vol. 40(7), pages 1379-1411, August.
    5. Green, Jerry R, 1981. "Value of Information with Sequential Futures Markets," Econometrica, Econometric Society, vol. 49(2), pages 335-358, March.
    6. Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, pages 509-524.
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    Cited by:

    1. Patron, Hilde, 2007. "The value of information about central bankers' preferences," International Review of Economics & Finance, Elsevier, vol. 16(1), pages 139-148.
    2. Banerjee, Anurag N. & Seccia, Giulio, 2002. "On the "Hirshleifer effect'' of unscheduled monetary policy announcements," Discussion Paper Series In Economics And Econometrics 213, Economics Division, School of Social Sciences, University of Southampton.
    3. Udo Broll & Jack E. Wahl & Christoph Wessel, 2011. "Export, Exchange Rate Risk and Hedging: The Duopoly Case," German Economic Review, Verein für Socialpolitik, vol. 12(4), pages 490-502, November.
    4. Tscharaktschiew, Stefan & Hirte, Georg, 2010. "How does the household structure shape the urban economy?," Regional Science and Urban Economics, Elsevier, pages 498-516.
    5. Broll, Udo & Eckwert, Bernhard, 2007. "The Competitive Firm Under Price Uncertainty: The Role of Information and Hedging," Dresden Discussion Paper Series in Economics 12/07, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    6. Bernhard Eckwert & Burkhard Drees, "undated". "Implications of Better Information for Technological Development and Welfare," EcoMod2006 272100022, EcoMod.
    7. Wong, Kit Pong, 2007. "Operational and financial hedging for exporting firms," International Review of Economics & Finance, Elsevier, vol. 16(4), pages 459-470.
    8. Wong, Kit Pong, 2006. "Foreign direct investment and forward hedging," Journal of Multinational Financial Management, Elsevier, pages 459-474.
    9. Drees, Burkhard & Eckwert, Bernhard, 2010. "Implications of more precise information for technological development and economic welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 266-279, February.
    10. Broll, Udo & Wahl, Jack E. & Wessel, Christoph, 2008. "Export production, hedging exchange rate risk: the duopoly case," Dresden Discussion Paper Series in Economics 06/08, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    11. Banerjee, Anurag N. & Seccia, Giulio, 2002. "On the "Hirshleifer effect'' of unscheduled monetary policy announcements," Discussion Paper Series In Economics And Econometrics 0213, Economics Division, School of Social Sciences, University of Southampton.
    12. Juan Carlos Hatchondo, 2005. "The value of information with heterogeneous agents and partially revealing prices," Working Paper 05-06, Federal Reserve Bank of Richmond.
    13. Broll, Udo & Eckwert, Bernhard, 2004. "Transparency in the Interbank Market and the Volume of Bank Intermediated Loans," Dresden Discussion Paper Series in Economics 10/04, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    14. Juan Hatchondo, 2004. "The value of information with heterogeneous agents and partially revealing prices," Econometric Society 2004 North American Summer Meetings 175, Econometric Society.
    15. Broll, Udo & Eckwert, Bernhard, 2009. "Modelling information and hedging: The exporting firm," Economic Modelling, Elsevier, vol. 26(5), pages 974-977, September.
    16. Bernhard Eckwert & Burkhard Drees, 2007. "Implications of More Precise Information for Technological Development and Welfare," IMF Working Papers 07/95, International Monetary Fund.
    17. Broll, Udo & Eckwert, Bernhard, 2003. "Transparency in the foreign exchange market and the volume of international trade," Dresden Discussion Paper Series in Economics 14/03, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.

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