I think one of the more practical things to come out of the information equilibrium model is the description of exchange rates. It is an incredibly simple model that effectively says that exchange rates have little to do with inflation or monetary policy, but are rather about aggregate demand in the two countries you are comparing. If my country's economy is booming and yours is flagging relative to long term trends, your currency is going to be cheap for me.
Share this post
Exchange rates and monetary policy
Share this post
I think one of the more practical things to come out of the information equilibrium model is the description of exchange rates. It is an incredibly simple model that effectively says that exchange rates have little to do with inflation or monetary policy, but are rather about aggregate demand in the two countries you are comparing. If my country's economy is booming and yours is flagging relative to long term trends, your currency is going to be cheap for me.