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Managed Floating as a Monetary Policy Strategy

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  • Peter Bofinger
  • Timo Wollmershäuser

Abstract

Although there seems to be a broad consensus among economists that purely floating or completely fixed exchange rates (the so-called corner solutions) are the only viable alternatives of exchange rate management, many countries do not behave according to this paradigm and adopt a strategy within the broad spectrum of exchange rate regimes that is limited by the two corner solutions. Many of these intermediate regimes are characterized by significant foreign exchange market interventions and a certain degree of exchange rate flexibility with non-preannounced exchange rate targets. While academic research in this area usually concentrates on some specific aspects of intermediate regimes (such as the effectiveness of interventions or institutional aspects), managed floating has rarely been analyzed as a comprehensive monetary policy strategy. In this paper, we present a monetary policy framework in which central banks simultaneously use the exchange rate and the interest rate as operating targets of monetary policy. We explain the mechanics of foreign exchange market interventions and sterilization and we explain why a central bank has an interest of controlling simultaneously the two operating targets. We derive the monetary policy rules for the two operating targets from a simple open economy macro model in which the uncovered interest parity condition and the monetary conditions index play a central role. Copyright Kluwer Academic Publishers 2003

Suggested Citation

  • Peter Bofinger & Timo Wollmershäuser, 2003. "Managed Floating as a Monetary Policy Strategy," Economic Change and Restructuring, Springer, vol. 36(2), pages 81-109, June.
  • Handle: RePEc:kap:ecopln:v:36:y:2003:i:2:p:81-109 DOI: 10.1023/B:ECOP.0000012258.15614.d8
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    Cited by:

    1. Stavros A. Drakopoulos & Anastassios D. Karayiannis, 2005. "A Review of Kuhnian and Lakatosian «Explanations» in Economics," History of Economic Ideas, Fabrizio Serra Editore, Pisa - Roma, vol. 13(2), pages 51-73.
    2. Renzo Rossini & Marco Vega, 2007. "The monetary policy transmission mechanism under financial dollarization: the case of Peru 1996-2006," Working Papers 2007-017, Banco Central de Reserva del Perú.
    3. Mauricio A. Hernández Monsalve & Ramón Javier Mesa Callejas, 2006. "El efecto de las intervenciones cambiarias: la experiencia colombiana 2004-2006," BORRADORES DEL CIE 004192, UNIVERSIDAD DE ANTIOQUIA - CIE.
    4. Frenkel, Roberto & Rapetti, Martin, 2014. "The real exchange rate as a target of macroeconomic policy," MPRA Paper 59335, University Library of Munich, Germany.
    5. Rossini, Renzo & Vega, Marco, 2007. "El mecanismo de transmisión de la política monetaria en un entorno de dolarización financiera: El caso del Perú entre 1996 y 2006," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 14, pages 11-32.
    6. Rapetti, Martin, 2005. "The Argentine Macroeconomy during the Post-Convertibility Period: Performance, Debates and Perspectives," MPRA Paper 57901, University Library of Munich, Germany.
    7. Peter Bofinger & Eric Mayer, 2007. "Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve," Open Economies Review, Springer, pages 291-305.
    8. Hiroya Akiba & Yukihiro Iida & Yoshihiro Kitamura, 2009. "The optimal exchange rate regime for a small country," International Economics and Economic Policy, Springer, pages 315-343.
    9. Renzo Rossini & Marco Vega, 2008. "The monetary policy transmission mechanism under financial dollarisation: the case of Peru 1996-2006," BIS Papers chapters,in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 395-412 Bank for International Settlements.
    10. Eduardo Ariel Corso, 2007. "Monetary Space in Latin America: A Criterion to Regime Selection," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, pages 111-144.
    11. Damill, Mario & Frenkel, Roberto, 2012. "Macroeconomic Policies, Growth, Employment, and Inequality in Latin America," WIDER Working Paper Series 023, World Institute for Development Economic Research (UNU-WIDER).
    12. Hernando Vargas H., 2005. "Exchange Rate Policy and Inflation Targeting in Colombia," IDB Publications (Working Papers) 1927, Inter-American Development Bank.
    13. Roberto Chang, 2008. "Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America," BORRADORES DE ECONOMIA 004518, BANCO DE LA REPÚBLICA.
    14. Marjan Petreski, 2012. "Output Volatility and Exchange Rate Considerations Under Inflation Targeting : A Review," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 528-537.
    15. Enrique Alberola & José María Serena, 2007. "Global financial integration, monetary policy and reserve accumulation. Assessing the limits in emerging economies," Working Papers 0706, Banco de España;Working Papers Homepage.
    16. Mariano Beltrani & Juan Cuattromo, 2012. "Redefining Monetary Policy Limits: Towards an Expansion of its Role in Economic Development," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, pages 121-168.
    17. Hernando Vargas H., 2005. "Política cambiaria y la fijación de metas inflacionarias en Colombia," Research Department Publications 4426, Inter-American Development Bank, Research Department.
    18. Diwa C Guinigundo, 2013. "A note on the effectiveness of intervention in the foreign exchange market: the case of the Philippines," BIS Papers chapters,in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 263-277 Bank for International Settlements.
    19. Timo Wollmershäuser, 2016. "Exchange Rate Policy in Croatia," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 17(1), pages 08-11, April.
    20. repec:unu:wpaper:wp2012-23 is not listed on IDEAS
    21. Frenkel, Roberto, 2008. "The competitive real exchange-rate regime, inflation and monetary policy," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    22. Lubomír Lízal & Jirí Schwarz, 2013. "Foreign exchange interventions as an (un)conventional monetary policy tool," BIS Papers chapters,in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 127-143 Bank for International Settlements.
    23. Frenkel, Roberto, 2007. "The sustainability of monetary sterilization policies," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).

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