On the Reasons Behind Fear of Floating: Pass-through Effects vs. Contractionary Depreciations
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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Bibliographic InfoPaper provided by Departamento de Economía, Universidad del Pacífico in its series Working Papers with number 04-02.
Length: 24 pages
Date of creation: Feb 2004
Date of revision: Apr 2004
Fear of floating; Central Bank Preferences; Dollarization; Pass-through; Contractionary Depreciations;
Other versions of this item:
- Juan F. Castro, 2004. "On the Reasons Behind Fear of Floating: Pass-through Effects vs. Contractionary Depreciations," Econometric Society 2004 Latin American Meetings 268, Econometric Society.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
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