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Learning under fear of floating

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  • Bigio, Saki

Abstract

In recent years a large fraction of economies overcame the fear of floating. We study a model that describes the policy of a Central Bank uncertain about whether currency depreciations cause output to expand (textbook model) or contract (balance-sheet model). We conclude that the movement away from fear of floating may not be explained by Bayesian or Robust policies. When the private sector anticipates the Central Bank's policy and endogenously determines the model, Central Banks may fall in a learning trap. An increase in financial volatility provides an escape to such trap that replicates patterns in the data.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 10 (October)
Pages: 1923-1950

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:10:p:1923-1950

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Balance-sheet effect Fear of floating Model uncertainty Bayesian learning Robustness;

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References

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Cited by:
  1. Ludwig, Alexander & Zimper, Alexander, 2014. "Biased Bayesian learning with an application to the risk-free rate puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 79-97.
  2. Thomas Windberger & Jesus Crespo Cuaresma & Janette Walde, 2012. "Dirty floating and monetary independence in Central and Eastern Europe - The role of structural breaks," Working Papers 2012-21, Faculty of Economics and Statistics, University of Innsbruck.

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