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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
Contact details of provider:
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. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  2. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
  3. Robert Flood & Nancy Marion, 1998. "Perspectives on the Recent Currency Crisis Literature," NBER Working Papers 6380, National Bureau of Economic Research, Inc.
  4. repec:fth:inadeb:418 is not listed on IDEAS
  5. repec:imf:imfpdp:93/10 is not listed on IDEAS
  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. 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.
  2. Luis F. Cernadas & E. René Aldazosa, 2011. "Estimación de una función de reacción para la política monetaria en Bolivia," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 1-36, enero-mar.
  3. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
  4. Andrew Berg & Paolo Mauro & Eduardo Borensztein, 2002. "An Evaluation of Monetary Regime Options for Latin America," IMF Working Papers 02/211, International Monetary Fund.
  5. 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.
  6. 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.

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