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Fear of Floating and Social Welfare

Demosthenes Tambakis ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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.

Keywords: Fear of floating; financial stability; policy credibility; emerging market economies. (search for similar items in EconPapers)
JEL-codes: E52 E58 F33 (search for similar items in EconPapers)
Pages: 29
Date: 2007-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: Ec
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0726

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