Using inflation and growth forecasts for a panel of emerging and advanced economies, we provide evidence that foreign forecasters publish and update their forecasts less frequently than local forecasters and make larger errors. We provide tests that identify differences in information frictions across groups and show that the lower accuracy of foreigners is not due to more irrational expectations, but to less precise information. This informational advantage is linked both to barriers to information and to incentives and is typically stronger when uncertainty is lower. These results provide a basis for disciplining international finance and trade models with heterogeneous information.

We examine the welfare-based opportunity cost of foreign exchange (FX) intervention when both covered interest rate parity (CIP) and uncovered interest rate parity (UIP) deviations are present. We consider a small open economy that receives international capital flows through constrained international financial intermediaries. Deviations from CIP come from limited arbitrage or through a convenience yield, while UIP deviations are also affected by global risk. We show that the sign of CIP and UIP deviations may differ for safe haven countries. We find that FX reserves may provide a net benefit, rather than a cost, when international intermediaries value the safe-haven properties of a currency more than domestic households. We show that this has been the case for the Swiss franc and the Japanese Yen. We examine the optimal policy of a constrained central bank planner in this context.