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Is fear of floating justified?: The East Asia experience

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  • Cavoli, Tony
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    Abstract

    This paper examines some of the open economy aspects of optimal monetary policies with a particular emphasis on those aspects that may induce a fear of floating on the part of central banks. Characteristics such as openness, exchange rate pass-through and adverse balance sheet effects have been highlighted in the recent literature as being possible reasons for fear of floating. Motivated by recent experiences in East Asia, this paper examines a range of policy configurations in a small open economy macro-model that contains the above characteristics and finds the most suited policy for each one. The policy configurations differ in the degree of exchange rate involvement in the formulation of the policy. The ultimate objective is to ascertain whether the exchange rate can be used in some capacity as a feasible objective of monetary policy. The paper finds that, for most model configurations, fear of floating policies perform well--in some cases they are the most suited policy. This suggests that fear of floating behaviour by central banks in open and developing economies is very much justified.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Policy Modeling.

    Volume (Year): 31 (2009)
    Issue (Month): 1 ()
    Pages: 1-16

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    Handle: RePEc:eee:jpolmo:v:31:y:2009:i:1:p:1-16

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    Web page: http://www.elsevier.com/locate/inca/505735

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    Keywords: Optimal monetary policy rules Fear of floating Exchange rates;

    References

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    1. Tanuwidjaja, Enrico & Choy, Keen Meng, 2006. "Central bank credibility and monetary policy in Indonesia," Journal of Policy Modeling, Elsevier, vol. 28(9), pages 1011-1022, December.
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    Cited by:
    1. Berganza, Juan Carlos & Broto, Carmen, 2011. "Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries," BOFIT Discussion Papers 9/2011, Bank of Finland, Institute for Economies in Transition.
    2. Sánchez, Marcelo, 2010. "What does South Korean inflation targeting target?," Journal of Asian Economics, Elsevier, vol. 21(6), pages 526-539, December.
    3. Carlos Garcia, 2012. "Why Does Monetary Policy Respond to the Real Exchange Rate in Small Open Economies? A Bayesian Perspective," ILADES-Georgetown University Working Papers inv287, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    4. Carlos Garcia & Wildo Gonzalez, 2014. "Why does monetary policy respond to the real exchange rate in small open economies? A Bayesian perspective," Empirical Economics, Springer, vol. 46(3), pages 789-825, May.

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