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Uncovering Central Bank Monetary Policy Objectives: Going Beyond Fear of Floating

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Author Info

  • Eduardo Moron

    (Universidad del Pacifico)

  • Juan F. Castro

    (Universidad del Pacifico)

Abstract

Highly volatile exchange rates don't come cheap in economies with large liability dollarization ratios. Therefore, central banks do not follow a unique objective of price stability but its preferences include an implicit exchange rate objective. This gives us reasons to believe that the Peruvian exchange rate could be characterized as a phony floater. From an mlogit framework and a monetary policy reaction function, we found evidence suggesting an implicit defense on the level of the exchange rate. Going beyond the argument of fear of floating as a key explanation for this, we explore the reasons behind the fear and the need of following certain objectives in liability-dollarized economies.

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File URL: http://128.118.178.162/eps/mac/papers/0205/0205002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0205002.

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Length: 33 pages
Date of creation: 01 May 2002
Date of revision:
Handle: RePEc:wpa:wuwpma:0205002

Note: Type of Document - pdf; prepared on IBM PC - PC-TEX/; to print on HP; pages: 33
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Web page: http://128.118.178.162

Related research

Keywords: Dollarization; liability dollarization; floating exchange rates; central bank preferences; multinomial logit; reaction function; GMM; monetary policy; Peru;

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References

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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  2. repec:fth:inadeb:418 is not listed on IDEAS
  3. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
  4. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "The Capital Inflows Problem: Concepts And Issues," Contemporary Economic Policy, Western Economic Association International, vol. 12(3), pages 54-66, 07.
  5. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
  6. Ricardo J. Caballero & Arvind Krishnamurthy, 2000. "Dollarization of Liabilities: Underinsurance and Domestic Financial Underdevelopment," NBER Working Papers 7792, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Juan Castro, 2004. "On the Reasons Behind Fear of Floating: Pass-through Effects vs. Contractionary Depreciations," Working Papers 04-02, Departamento de Economía, Universidad del Pacífico, revised Apr 2004.
  2. Hanen Gharbi, 2005. "La gestion des taux de change dans les pays émergents. La leçon des expériences récentes," Revue de l'OFCE, Presses de Sciences-Po, vol. 95(4), pages 279-326.
  3. Berg, Andrew & Borensztein, Eduardo & Mauro, Paolo, 2002. "An evaluation of monetary regime options for Latin America," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 213-235, December.
  4. Cernadas, Luis & Aldazosa, René, 2011. "Estimación de una Función de Reacción para la Política Monetaria en Bolivia
    [Estimating a Monetary Policy Reaction Function for Bolivia]
    ," MPRA Paper 40592, University Library of Munich, Germany.
  5. Rossini Miñán, Renzo, 2001. "Aspectos de la adopción de un régimen de metas de inflación en el Perú," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 7.
  6. Amartya Lahiri & Carlos A. Vegh, 2001. "Living with the Fear of Floating: An Optimal Policy Perspective," NBER Working Papers 8391, National Bureau of Economic Research, Inc.
  7. Morón, Eduardo & Winkelried, Diego, 2002. "Reglas de política monetaria para economías financieramente vulnerables," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 8, pages 49-76.
  8. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.

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