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

  • Burkhard Drees
  • Bernhard Eckwert

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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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 11 (2003)
Issue (Month): 3 (08)
Pages: 453-463

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Handle: RePEc:bla:reviec:v:11:y:2003:i:3:p:453-463
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  1. Green, Jerry R, 1981. "Value of Information with Sequential Futures Markets," Econometrica, Econometric Society, vol. 49(2), pages 335-58, March.
  2. Orosel, Gerhard O., 1996. "Informational efficiency and welfare in the stock market," European Economic Review, Elsevier, vol. 40(7), pages 1379-1411, August.
  3. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-53, May.
  4. Grossman, Sanford J & Kihlstrom, Richard E & Mirman, Leonard J, 1977. "A Bayesian Approach to the Production of Information and Learning by Doing," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 533-47, October.
  5. Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, vol. 91(3), pages 509-524, June.
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