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On the Reasons Behind Fear of Floating: Pass-through Effects vs. Contractionary Depreciations

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  • Juan Castro

    ()
    (Departamento de Economía, Universidad del Pacífico)

Abstract

"Based on a simple open economy framework, this analysis rationalizes the existence of “fear of floating”- type responses and uncovers some important implications about to role of pass-through effects and contractionary depreciations. By examining how the optimal monetary response varies when altering the effects of the real exchange rate on output and inflation, this analysis reveals the existence of nonlinearities when we allow for contractionary depreciations. In particular, an increase in the pass-through coefficient may well imply the need to tighten or relax the monetary stance depending on how contractionary real depreciations are. These findings may help to understand the empirical results where pass-through effects have failed to appear significant when accounting for low exchange rate and high interest rate variability. They also reveal the complications that arise when conducting monetary policy in a partially dollarized economy."

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File URL: http://www.up.edu.pe/ciup/SiteAssets/Lists/JER_Jerarquia/EditForm/20060918103358_DD-04-02.pdf
File Function: First Version, 2004
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Bibliographic Info

Paper provided by Departamento de Economía, Universidad del Pacífico in its series Working Papers with number 04-02.

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Length: 24 pages
Date of creation: Feb 2004
Date of revision: Apr 2004
Handle: RePEc:pai:wpaper:04-02

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Web page: http://www.up.edu.pe/
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Related research

Keywords: Fear of floating; Central Bank Preferences; Dollarization; Pass-through; Contractionary Depreciations;

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References

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  1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Closed versus Open Economies: An Integrated Approach," NBER Working Papers 8604, National Bureau of Economic Research, Inc.
  3. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
  4. Eric Parrado & Andres Velasco, 2002. "Optimal Interest Rate Policy in a Small Open Economy," NBER Working Papers 8721, National Bureau of Economic Research, Inc.
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  6. Assaf Razin & Chi-Wa Yuen, 2001. "The "New Keynesian" Phillips Curve: Closed Economy vs. Open Economy," NBER Working Papers 8313, National Bureau of Economic Research, Inc.
  7. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
  8. Eduardo Moron & Juan F. Castro, 2002. "Uncovering Central Bank Monetary Policy Objectives: Going Beyond Fear of Floating," Macroeconomics 0205002, EconWPA.
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