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

Eduardo Moron () and Juan F. Castro ()

Abstract: 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.

Keywords: Dollarization; liability dollarization; floating exchange rates; central bank preferences; multinomial logit; reaction function; GMM; monetary policy; Peru (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-mon
Date: Written 2002-05-01
Note: Type of Document - pdf; prepared on IBM PC - PC-TEX/; to print on HP; pages: 33
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