Uncovering Central Bank Monetary Policy Objectives: Going Beyond Fear of Floating
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.
|Date of creation:||01 May 2002|
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