Exchange-rate policy and monetary information

Abstract

This paper develops a model of a small open economy in which the presence of local deviations from purchasing power parity give rise to differential information. It is assumed that the monetary authorities are committed to buy and sell foreign exchange in order to support an exchange-rate policy rule. It is demonstrated that exchange-rate policy can influence the distribution of real output (i) if agents possess incomplete and differential information and (ii) if they have contemporaneous money supply (or balance of payments) information. It is also shown that exchange-rate policy can be effective because of its ability to influence the information content of available monetary data. The argument is turned around and used to support the frequent release of monetary data. © 1983 Butterworth & Co (Publishers) Ltd.