Policy Signaling in the Open Economy: A Re-Examination / Allan Drazen.

Format:

Book

Author/Creator:

Drazen, Allan.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5892.

NBER working paper series no. w5892

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Policy Signaling in the Open Economy

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

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.

Notes:

Print version record

January 1997.