Rational expectations<\/p>\n
The crucial role of timely, credible and comprehensive
\ninformation in the financial market has been reemphasized in the
\nwake of the latest bout of speculative attacks on the currencies
\nof several countries in Southeast Asia. The most notable attacks
\nbeing on Thailand, the Philippines, Malaysia and Indonesia.<\/p>\n
That the financial industry, notably the foreign exchange
\nmarket, is highly sensitive to information is nevertheless not a
\nnew phenomenon. But this fact, established a long time ago
\nthrough a series of empirical studies, resurfaced after an ASEAN
\nreaction to the regional currency instability..<\/p>\n
The foreign ministers of the nine-member Association of
\nSoutheast Asian Nations (ASEAN) agreed, at their latest annual
\nmeeting in Kuala Lumpur late last month, to blame an
\ninternational conspiracy for the speculative assaults on their
\ncurrencies.<\/p>\n
The ministers, riled by the currency speculations despite what
\nthey persistently claim as their strong economic fundamentals,
\nagreed in their joint statement that the speculative attacks
\ncould be traced to well coordinated efforts to destabilize ASEAN
\ncurrencies for self-serving purposes. Prime Minister Mahathir
\nMohamad of Malaysia, the host of the meeting, even went as far as
\nsingling out American financier George Soros.<\/p>\n
However understandable the foreign ministers' disillusion with
\nthe havoc caused by the currency crisis-- because the economic
\nfundamentals of their countries (except Thailand) have been
\nassessed even by international analysts as fairly sound-- finding
\na scapegoat is not useful, if not a wholly futile exercise.<\/p>\n
American Undersecretary of State for Economic Affairs Stuart
\nE. Eizenstat, who visited Jakarta last week after the Kuala
\nLumpur meeting, conveyed a more sensible message. He asserted at
\na news conference that it had been the strained economy of a
\ncountry (in this case Thailand) which set off its currency
\ninstability with a consequent contagion to other Southeast Asian
\ncountries.<\/p>\n
Eizenstat said the regional currency volatility had not been
\ntriggered by speculators. In fact, it was because the financial
\nmarkets detected problems and reacted accordingly. Speculators
\nonly took advantage of this trend and made money. But as its name
\nsuggests, speculation usually spreads quickly and widely on the
\nback of irrational expectations. However speculation lasts only
\nfor a short period of time until a sensible reality once again
\nprevails.<\/p>\n
What Eizenstat implicitly alluded to is that market perception
\nof an economy's condition greatly influences the price of its
\ncurrency. The market perception in turn influences the rational
\nmarket expectations of appreciation or depreciation of a
\nparticular currency. Herein lies the pivotal role of timely,
\ncredible, comprehensive information on an economy. It is this
\ninformation which affects market perception.<\/p>\n
This, however, does not defy the fact that sound economic
\nfundamentals and prudent macro-economic management as well as a
\nconsistent policy are prerequisites for maintaining a stable
\ncurrency. However they are, by themselves, not enough.<\/p>\n
Lack of credible, timely information could create a wide gap
\nbetween how the condition of an economy is perceived by the
\nmarket and the actual situation.<\/p>\n
As the financial market -- of which the foreign exchange
\nmarket is the largest segment with an estimated average daily
\nturnover of more than US$1.3 trillion -- has increasingly been
\nglobalized, it has also become more sensitive to information.<\/p>\n
It is no wonder, therefore, that the International Monetary
\nFund has issued guidelines for countries regarding the kind of
\nbasic or key economic indicators they should disseminate to the
\nmarket. The more up-to-date, comprehensive and credible the
\ndisseminated information, the more effective it will be in
\npreventing or reducing the gap between the market perception and
\nthe actual condition of an economy.<\/p>\n
Well-informed markets have rational expectations and minimize
\nthe possibilities of irrational, wild speculations.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/rational-expectations-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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