The information content of the exchange rate and the stability of real output under alternative exchange-rate regimes

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1983-01-01

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Abstract

When the exchange rate is flexible, and thus responds to market forces, it provides agents with useful information, while when it is fixed (by a feedback rule) it does not. The implications of this asymmetry for the stability of real output under the two regimes is discussed. It is shown that whenever shocks are predominantly of one variety, or when domestic monetary shocks accompanied by one real shock, a flexible exchange rate does a better job of stabilizing real output than does a fixed exchange rate. These results undermine arguments favoring fixed exchange rates because they 'discipline' monetary policy. In addition, it is demonstrated that managed floating rules and exchange rate feedback rules are irrelevant for the distribution of real output. © 1983.

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10.1016/0261-5606(83)90004-9

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Kimbrough, KP (1983). The information content of the exchange rate and the stability of real output under alternative exchange-rate regimes. Journal of International Money and Finance, 2(1). pp. 27–38. 10.1016/0261-5606(83)90004-9 Retrieved from https://hdl.handle.net/10161/1969.

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Kimbrough

Kent P. Kimbrough

Professor of Economics

Professor Kimbrough specializes in the fields of macroeconomics and international economics. His latest research explores the revenue maximizing inflation rate, optimal taxes and tariffs in the presence of private information, the welfare costs of inflation, and interest rate rules and uniqueness in the presence of transactions costs. In prior work he has investigated the macroeconomic effects of trade policy, the impact of bilateral tariffs, foreign exchange controls and capital controls, the real effects of inflation, optimal taxation and Friedman’s rule, and the information content of prices and the role of monetary policy. His most recent published work investigates “Optimal Taxes and Tariffs with Private Information” and “Revenue Maximizing Inflation.” His earlier work explored such subjects as “Price, Output, and Exchange Rate Movements in the Open Economy,” “Aggregate Information and the Role of Monetary Policy in an Open Economy,” “Foreign Aid and Optimal Fiscal Policy,” “An Investigation in the Theory of Foreign Exchange Controls,” “The Optimum Quantity of Money Rule in the Theory of Public Finance,” and “Tax Regimes, Tariff Revenues, and Government Spending.”


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