Pierre De Leo, University of Maryland
10:00-11:30 a.m., November 21, 2023, GMT+8
248, Chengzeyuan, PKU & Zoom Meeting ID: 926 3889 7210 (Passcode: 908060)
Should exchange rate policy communication be transparent or intentionally opaque? We show that it depends on whether expectations depart from rationality. We develop a macroeconomic model in which agents overreact to their private information about fundamentals and use the exchange rate as a public signal to learn about the private information of others. In this environment, central bank communication surrounding foreign exchange (FX) interventions can influence the information content of the exchange rate and can be used to “manage expectations.” While FX interventions that are publicly announced provide additional information about fundamentals, secret FX interventions can instead decrease the informational content of the exchange rate. If the overreaction bias is strong enough, it can be optimal to intervene secretly to reduce the informativeness of the exchange rate. Our model rationalizes observed practices in exchange rate policies such as managed floats and the opacity surrounding FX interventions.
National School of Development, PKU