How Tight Should One's Hands be Tied? Fear of Floating and the Credibility of Exchange Rate Regimes

Jesús Rodríguez-López and Hugo Rodriguez Mendizabal ()
Authors registered in the RePEc Author Service: Jesús Rodríguez-López ()

The B.E. Journal of Macroeconomics, 2006, vol. topics.6, issue 1, pages 4

Abstract:

The literature on exchange rate regimes has recently observed that officially self-declared free floaters intervene strongly in foreign exchange markets to maintain their nominal exchange rates within some unannounced bands. In this paper, we provide an explanation of this behavior, labeled by Calvo and Reinhart as fear of floating. First, we analyze the linkages between the credibility of the exchange rate regime, the volatility of the exchange rate, and the band width of fluctuations. Second, we use the model to understand the reduction in volatility experienced by most ERM countries after their target zones widened in August 1993. Finally, we solve the model for a subgame perfect equilibrium, in which fear of floating can be viewed as the credible choice of a finite non-zero band.

Keywords: Fear of floating; target zones; exchange rate arrangements; credibility (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 F33 (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.bepress.com/cgi/viewcontent.cgi?article=1401&context=bejm (application/pdf)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bpj:bejmac:v:topics.6:y:2006:i:1:n:4

Ordering information: This journal article can be ordered from
http://www.degruyter.com/view/j/bejm

Access Statistics for this article

More articles in The B.E. Journal of Macroeconomics from De Gruyter
Series data maintained by Peter Golla ().