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Learning under fear of floating

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  • Bigio, Saki

Abstract

In recent years a large fraction of economies overcame the fear of floating. We study a model that describes the policy of a Central Bank uncertain about whether currency depreciations cause output to expand (textbook model) or contract (balance-sheet model). We conclude that the movement away from fear of floating may not be explained by Bayesian or Robust policies. When the private sector anticipates the Central Bank's policy and endogenously determines the model, Central Banks may fall in a learning trap. An increase in financial volatility provides an escape to such trap that replicates patterns in the data.

Suggested Citation

  • Bigio, Saki, 2010. "Learning under fear of floating," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1923-1950, October.
  • Handle: RePEc:eee:dyncon:v:34:y:2010:i:10:p:1923-1950
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    Cited by:

    1. Ludwig, Alexander & Zimper, Alexander, 2014. "Biased Bayesian learning with an application to the risk-free rate puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 79-97.
    2. Thomas Windberger & Jesus Crespo Cuaresma & Janette Walde, 2012. "Dirty floating and monetary independence in Central and Eastern Europe - The role of structural breaks," Working Papers 2012-21, Faculty of Economics and Statistics, University of Innsbruck.

    More about this item

    Keywords

    Balance-sheet effect Fear of floating Model uncertainty Bayesian learning Robustness;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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