How Does Information Affect the Comovement Between Interest Rates and Exchange Rates?

Marcelo Sanchez ()
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Marcelo Sanchez: European Central Bank

Rivista Internazionale di Scienze Sociali, 2007, vol. 115, issue 4, 547-562

Abstract: This paper sets up a small open economy model to compare the link between exchange rates and interest rates under full and imperfect information. The informational friction considered here corresponds to the case where the central bank, while failing to observe output and inflation, can extract some information about these variables from the private sector (asymmetric information with signal extraction). This informational friction generates an optimal deviation from the full information outcome, with the realisation of a relatively less frequent shock leading the central bank to behave as if a more likely disturbance had instead taken place. This indicates that policies that would be optimal under full information are not optimal when knowledge is imperfect.

Keywords: Transmission mechanism; Exchange rate; Optimal monetary policy; Imperfect information (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 F41 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:vep:journl:y:2007:v:115:i:4:p:547-562

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