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Does monetary policy credibility mitigate the fear of floating?

Gabriel Montes and Caio Ferrari Ferreira

Economic Modelling, 2020, vol. 84, issue C, 76-87

Abstract: Based on the argument that monetary policy credibility can reduce the fear of floating, we analyze this hypothesis for a set of 47 countries (of which, 32 are developing countries, 26 are Inflation Targeting countries and 16 are Inflation Targeting developing countries). Our study is the first to empirically assess the impact of monetary policy credibility (defined as the central bank's ability to anchor inflation expectations to the target) on the central banks' reaction through the basic interest rate due to exchange rate fluctuations (fear of floating). Based on panel data methodology applied to different samples, the most important result of this paper is that monetary policy credibility is able to mitigate the fear of floating. However, this effect is weaker after the crisis. Our estimates also reveal that Inflation Targeting developing countries present stronger fear of floating, which is justified by the fear of inflation in these countries.

Keywords: Fear of floating; Credibility; Monetary policy; Exchange rate; Inflation targeting (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 E62 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:84:y:2020:i:c:p:76-87

DOI: 10.1016/j.econmod.2019.03.010

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