Does fear of floating shape monetary policy and does it matter?

Asif Ahmad (), Richard Mcmanus () and Gulcin Ozkan
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Asif Ahmad: University of York
Richard Mcmanus: Canterbury Christ Church University

Economics Bulletin, 2024, vol. 44, issue 3, 1055 - 1095

Abstract: Despite overwhelming evidence on the enduring preference for limiting exchange rate variability, our understanding of how such fear of floating (FoF) impacts policy and macroeconomic outcomes is far from complete. Using data from 166 countries over 1950-2019, we show that (i) FoF has been prevalent throughout our sample period; (ii) FoF is a major driver of monetary procyclicality; and (iii) both FoF and procyclical monetary policy result in adverse outcomes in the form of greater volatility in output and inflation and lower output growth. As such, our findings point to the importance of establishing frameworks to build up resilience against exchange rate variability as a key step in establishing countercyclicality and boosting short-term stability and long-term growth.

Keywords: monetary policy; exchange rates; inflation; growth; procyclicality; fear of floating. (search for similar items in EconPapers)
JEL-codes: E5 F3 (search for similar items in EconPapers)
Date: 2024-09-30
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