 On the Reasons Behind Fear of Floating: Pass-through Effects vs. Contractionary DepreciationsNo 268, Econometric Society 2004 Latin American Meetings from Econometric Society Abstract: Based on a simple open economy framework, this analysis rationalizes the existence of “fear of floating†-type responses and uncovers some important implications about to role of pass-through effects and contractionary depreciations. By examining how the optimal monetary response varies when altering the effects of the real exchange rate on output and inflation, this analysis reveals the existence of non-linearities when we allow for contractionary depreciations. In particular, an increase in the pass-through coefficient may well imply the need to tighten or relax the monetary stance depending on how contractionary real depreciations are. These findings may help to understand the empirical results where pass-through effects have failed to appear significant when accounting for low exchange rate and high interest rate variability. They also reveal the complications that arise when conducting monetary policy in a partially dollarized economy. Keywords: Fear of floating; central bank preferences; dollarization; pass-through; contractionary depreciations (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ecm:latm04:268 Access Statistics for this paper More papers in Econometric Society 2004 Latin American Meetings from Econometric Society Contact information at EDIRC. |
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