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Does fear of floating shape monetary policy and does it matter?

Author

Listed:
  • Asif Ahmad

    (University of York)

  • Richard Mcmanus

    (Canterbury Christ Church University)

  • Gulcin Ozkan

    (King's College London)

Abstract

Despite overwhelming evidence on the enduring preference for limiting exchange rate variability, our understanding of how such fear of floating (FoF) impacts policy and macroeconomic outcomes is far from complete. Using data from 166 countries over 1950-2019, we show that (i) FoF has been prevalent throughout our sample period; (ii) FoF is a major driver of monetary procyclicality; and (iii) both FoF and procyclical monetary policy result in adverse outcomes in the form of greater volatility in output and inflation and lower output growth. As such, our findings point to the importance of establishing frameworks to build up resilience against exchange rate variability as a key step in establishing countercyclicality and boosting short-term stability and long-term growth.

Suggested Citation

  • Asif Ahmad & Richard Mcmanus & Gulcin Ozkan, 2024. "Does fear of floating shape monetary policy and does it matter?," Economics Bulletin, AccessEcon, vol. 44(3), pages 1055-1095.
    • Handle: RePEc:ebl:ecbull:eb-24-00192
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    File URL: http://www.accessecon.com/Pubs/EB/2024/Volume44/EB-24-V44-I3-P83.pdf
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    More about this item

    Keywords

    monetary policy; exchange rates; inflation; growth; procyclicality; fear of floating.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

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