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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. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
  2. Ricardo J. Caballero & Arvind Krishnamurthy, 2000. "Dollarization of Liabilities: Underinsurance and Domestic Financial Underdevelopment," NBER Working Papers 7792, National Bureau of Economic Research, Inc.
  3. repec:fth:inadeb:418 is not listed on IDEAS
  4. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "The capital inflows problem: Concepts and issues," MPRA Paper 13902, University Library of Munich, Germany.
  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. 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.
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Citations

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Cited by:
  1. 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.
  2. 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.
  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. 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. Andrew Berg & Paolo Mauro & Eduardo Borensztein, 2002. "An Evaluation of Monetary Regime Options for Latin America," IMF Working Papers 02/211, International Monetary Fund.
  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.
  7. Amartya Lahiri & Carlos A. Végh, 2002. "Living with the Fear of Floating: An Optimal Policy Perspective," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 663-704 National Bureau of Economic Research, Inc.
  8. 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.

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