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Is fear of floating justified?: The East Asia experience

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  • Cavoli, Tony

Abstract

This paper examines some of the open economy aspects of optimal monetary policies with a particular emphasis on those aspects that may induce a fear of floating on the part of central banks. Characteristics such as openness, exchange rate pass-through and adverse balance sheet effects have been highlighted in the recent literature as being possible reasons for fear of floating. Motivated by recent experiences in East Asia, this paper examines a range of policy configurations in a small open economy macro-model that contains the above characteristics and finds the most suited policy for each one. The policy configurations differ in the degree of exchange rate involvement in the formulation of the policy. The ultimate objective is to ascertain whether the exchange rate can be used in some capacity as a feasible objective of monetary policy. The paper finds that, for most model configurations, fear of floating policies perform well--in some cases they are the most suited policy. This suggests that fear of floating behaviour by central banks in open and developing economies is very much justified.

Suggested Citation

  • Cavoli, Tony, 2009. "Is fear of floating justified?: The East Asia experience," Journal of Policy Modeling, Elsevier, vol. 31(1), pages 1-16.
  • Handle: RePEc:eee:jpolmo:v:31:y:2009:i:1:p:1-16
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    References listed on IDEAS

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    Cited by:

    1. Sánchez, Marcelo, 2010. "What does South Korean inflation targeting target?," Journal of Asian Economics, Elsevier, vol. 21(6), pages 526-539, December.
    2. Berganza, Juan Carlos & Broto, Carmen, 2012. "Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 428-444.
    3. repec:eee:jpolmo:v:39:y:2017:i:2:p:349-370 is not listed on IDEAS
    4. Cavoli, Tony & Wilson, John K., 2015. "Corruption, central bank (in)dependence and optimal monetary policy in a simple model," Journal of Policy Modeling, Elsevier, vol. 37(3), pages 501-509.
    5. Jalali Naini, Ahmad Reza & Naderian, Mohammad Amin, 2017. "Financial Vulnerability and Stabilization Policy in Commodity Exporting Emerging Economies," MPRA Paper 84481, University Library of Munich, Germany.
    6. Carlos Garcia & Wildo Gonzalez, 2014. "Why does monetary policy respond to the real exchange rate in small open economies? A Bayesian perspective," Empirical Economics, Springer, vol. 46(3), pages 789-825, May.
    7. García, Carlos J. & González, Wildo D., 2013. "Exchange rate intervention in small open economies: The role of risk premium and commodity price shocks," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 424-447.

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