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Uncovering Central Bank Monetary Policy Objectives: Going Beyond Fear of Floating

  • Eduardo Moron

    (Universidad del Pacifico)

  • Juan F. Castro

    (Universidad del Pacifico)

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://econwpa.repec.org/eps/mac/papers/0205/0205002.pdf
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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
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  2. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
  3. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
  4. Ricardo J. Caballero & Arvind Krishnamurthy, 2000. "Dollarization of Liabilities: Underinsurance and Domestic Financial Underdevelopment," NBER Working Papers 7792, National Bureau of Economic Research, Inc.
  5. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "The capital inflows problem: Concepts and issues," MPRA Paper 13902, University Library of Munich, Germany.
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