Abstract
This chapter develops a formal model where interventions are fully neutralized and signal future changes in monetary policy. Of key interest is the determination of exchange rates as a function of intervention policies. Thereby the formation of private sector expectations will be crucial for the analysis.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
On the other hand, Turnovksy and d’Orey [1986] consider a static optimization problem within a dynamic Dornbusch-type model. There, policymakers are shortsighted by focussing solely on the period of policy impact. In our view, this implicitly introduces irrationality on the part of decisionmakers since they do not exploit this given model structure. The choice between static and dynamic model types is a general issue. We come back to our choice of the former in the discussion in Chapter 5.
Our interest lies not in an explicit model of the repeated game as such, but in its economic implications for the effectiveness of interventions as signals. These types of games have been well studied in the literature (see Rogoff [1987] for a survey).
In this context, Bordo and Schwartz [1990] have raised the interesting issue in how far other sterilized money market operations might also be used to signal future changes in the money supply. It is suggested here that sterilized interventions may be superior to any other operation that changes the composition of domestic central bank assets, again through the enhanced credibility generated by the risk of central bank funds.
From a discussion with Professor Dr. H. Hesse, president of Landeszentralbank in der freien Hansestadt Bremen, in Niedersachsen und Sachsen-Anhalt, Germany.
See Bickel and Doksum [1977] for a presentation of Bayes’ theorem and its role in decisionmaking.
The expected utility hypothesis is due to von Neumann and Morgenstern [1944]; for a discussion see any textbook such as McKenna [1986]. If objective probabilities are not given, it is assumed that decisionmakers are able to generate their own consistent probability estimates, and that Savage’s Subjective Utility Theory is applicable (see Kami and Schmeidler [1981, pp. 1792–1810]).
Similarly, the analysis of profit-maximization of firms avoids the difficulties associated with the formulation of preferences.
Other arguments of defense are “learning” and “market competition” which eliminates non-rationality (for a discussion see MacFadyen [1986]).
We use the term “objective” here to indicate a state of complete information (see section 2.4.1) and identical beliefs among agents. Indeed, the distinction between objective and subjective probabilities is unnecessary in most economic rational expectations models. Bayesian updating requires the consistency of beliefs, but it is irrelevant whether these are subjectively or objectively determined. These terms are only meaningful if we allow the subjectivity of probability estimates to be of a consequence for economic equilibrium, which is the case in the context of non-rational expectations models. Moreover, we agree with Hirshleifer and Riley [1988, p. 1–6,7] that the much more relevant distinction in (rational) models of Bayesian updating is between “hard” and “soft” beliefs, an issue that plays a central role for all types of expectations.
The pessimistic view about mass behavior of Sighele [1895] discussed in Kalkhofen and Faßheber [1983, pp. 7–10] of “La Folla Delinquente” (criminal masses) should be mentioned here out of historical interest.
Of course, the inefficiency of the foreign exchange market may also stem from the existence of transactions costs or the Peso problem (see Frankel and Froot [1987] for a discussion).
For a description of data sources see Takagi [1991].
But notice that the term “bounded rationality” encompasses more than just the aquisition of information and thus readies further than the term “limited capacity” as it is used here (see p. 42).
For a good analysis of two types of expectations (rational and non-rational) and the determination of market equilibrium in the context of road congestion, see Haltiwanger and Waldman [1985].
Barro and Gordon, in limiting the punishment phase to one period, cannot attain this “optimal” result. See below.
These strategies are not unique. The punishment phase could be shorter or random. But one period of punishment is generally not enough to generate the commitment regime as a reputational equilibrium. Barro and Gordon [1983] show that the assumption of one period of punishment imposes limits on the set of sustainable reputational equilibria.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 1993 Physica-Verlag Heidelberg
About this chapter
Cite this chapter
Fabian, S. (1993). A Signalling Model of Interventions. In: Exchange Rate Management in Interdependent Economies. Handeln und Entscheiden in komplexen ökonomischen Situationen, vol 9. Physica-Verlag HD. https://doi.org/10.1007/978-3-642-50029-9_3
Download citation
DOI: https://doi.org/10.1007/978-3-642-50029-9_3
Publisher Name: Physica-Verlag HD
Print ISBN: 978-3-7908-0729-5
Online ISBN: 978-3-642-50029-9
eBook Packages: Springer Book Archive