The New Drivers of Fear of Floating: Evidence from Latin America

Jonathan Malagón and Orbegozo Camila ()
Additional contact information
Orbegozo Camila: Ministry of Finance Colombia, Macroeconomic and Fiscal Policy Department, Bogota, Colombia

Journal of Globalization and Development, 2019, vol. 10, issue 1, 17

Abstract: There exists a consensus in the literature that during the 90s the main reason for fear of floating in emerging economies was the excessive liabilities dollarization, both in private and public sectors, which resulted in central banks’ interventions over the exchange rate. The main objective of these interventions was preventing the negative balance sheet effects originated by currency depreciations. Latin America certainly fits in this description, as convincingly documented by Calvo and Reinhart (Calvo, Guillermo A., and Carmen M. Reinhart. 2002. “Fear of Floating.” Quarterly Journal of Economics 117 (2): 379–408.). However, Latin American economies have reduced their debt in foreign currency since the early 2000s. Moreover, these economies extensively increased their amount of international reserves in the last decade and some of them – like Colombia and Mexico – have even reached the IMF’s flexible credit line, which operates as an international lender of last resort. All these changes – lower liability dollarization, higher international reserves, and new collaterals – suggest that the fear of devaluating in Latin America should be lower. Nevertheless, floating has not been the decision in terms of exchange rate policy. Conversely, most of Latin American countries that announced free floating opted for managed floating regimes and discretional interventions, in what can be considered as a new era of fear of floating. This paper finds empirical evidence that the main motivation for fear of floating has changed during the recent boom in commodity prices, 2005–2013, when foreign exchange interventions under flexible regimes were focused on avoiding excessive currency appreciations and apparently preventing Dutch disease.

Keywords: balance of payments dominance; deindustrialization; Dutch disease; exchange rate regimes; fear of floating; liability dollarization (search for similar items in EconPapers)
JEL-codes: E52 F31 F33 F43 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/jgd-2017-0012 (text/html)
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: https://EconPapers.repec.org/RePEc:bpj:globdv:v:10:y:2019:i:1:p:17:n:1

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/jgd/html

DOI: 10.1515/jgd-2017-0012

Access Statistics for this article

Journal of Globalization and Development is currently edited by Joseph E. Stiglitz, Kevin Gallagher, Jeronim Capaldo, Arjun Jayadev, José Antonio Ocampo and Dani Rodrik

More articles in Journal of Globalization and Development from De Gruyter
Bibliographic data for series maintained by Peter Golla ().