ENGLISH

On the Reasons Behind Fear of Floating: Pass-through Effects vs. Contractionary Depreciations

By Juan F Castro

Book information

Publisher
Universidad del Pacífico (UP)
Year
2004
Language
english
Format
PDF
Filesize
182 kB (186052 bytes)
Series
Documento de Discusión; DD/04/02
Pages
26\26
Time added
2021-02-24 16:35:44
central bank preferencescontractionary depreciationsdollarizationpass-throughPolítica monetaria; peru; Economía peruana; Peruvi

Description

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 nonlinearities 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. Key words: Fear of floating, central bank preferences, dollarization, pass-through, contractionary depreciations on the reasons caratula.pdf Documento de Discusión

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