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Fear of Floating and Social Welfare

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  • Tambakis, D.N.

Abstract

This paper studies the welfare implications of financial stability and inflation stabilization as distinct monetary policy objectives. Introducing asymmetric aversion to exchange rate depreciation in the Barro-Gordon model mitigates inflation bias due to credibility problems. The net welfare impact of fear of floating depends on the economy’s recent track record, the credibility of monetary policy, and the central bank’s discount factor. It is shown that fear of floating is more appropriate for financially fragile developing countries with imperfectly credible monetary policy than for advanced economies.

Suggested Citation

  • Tambakis, D.N., 2007. "Fear of Floating and Social Welfare," Cambridge Working Papers in Economics 0726, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0726
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    More about this item

    Keywords

    Fear of floating; financial stability; policy credibility; emerging market economies.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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