Fear of Floating and Social Welfare

Demosthenes N. Tambakis ()

International Journal of Central Banking, 2007, vol. 3, issue 3, pages 183-204

Abstract: This paper studies the welfare implications of financial stability and inflation stabilization as distinct monetary policy objectives. Introducing asymmetric aversion to exchange rate depreciation in the Barro-Gordon model mitigates inflation bias due to credibility problems. The net welfare impact of fear of floating depends on the economy's recent track record, the credibility of monetary policy, and the central bank's discount factor. It is shown that fear of floating is more appropriate for financially fragile developing countries with imperfectly credible monetary policy than for advanced economies.

JEL-codes: E52 E58 F33 (search for similar items in EconPapers)
Date: 2007
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Working Paper: Fear of Floating and Social Welfare (2007)
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