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How Tight Should One's Hands be Tied? Fear of Floating and the Credibility of Exchange Rate Regimes
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Jesús Rodríguez-López
Veröffentlicht/Copyright:
13. März 2006
Abstract
The literature on exchange rate regimes has recently observed that officially self-declared free floaters intervene strongly in foreign exchange markets to maintain their nominal exchange rates within some unannounced bands. In this paper, we provide an explanation of this behavior, labeled by Calvo and Reinhart as fear of floating. First, we analyze the linkages between the credibility of the exchange rate regime, the volatility of the exchange rate, and the band width of fluctuations. Second, we use the model to understand the reduction in volatility experienced by most ERM countries after their target zones widened in August 1993. Finally, we solve the model for a subgame perfect equilibrium, in which fear of floating can be viewed as the credible choice of a finite non-zero band.
Published Online: 2006-03-13
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Schlagwörter für diesen Artikel
Fear of floating;
target zones;
exchange rate arrangements;
credibility
Artikel in diesem Heft
- Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks
- Frontiers Article
- 10.2202/1534-6013.1320
- Advances Article
- Monetary Policy and Uncertainty about the Natural Unemployment Rate: Brainard-Style Conservatism versus Experimental Activism
- Quantifying the Effects of the Demographic Transition in Developing Economies
- Inflation, Prices, and Information in Competitive Search
- Contributions Article
- Inflation Inertia in Sticky Information Models
- Job Separation Under Uncertainty and the Wage Distribution
- A Closed Form Solution to the Ramsey Model
- Convergence and Stability in U.S. Employment Rates
- What Does the Solow Model Tell Us about Economic Growth?
- Consumption and Health
- Capital Maintenance versus Technology Adoption Under Embodied Technical Progress
- Let a Thousand Models Bloom: The Advantages of Making the FOMC a Truly 'Open Market'
- Does Inflation Grease the Wheels of the Labor Market?
- The Relative Price and Relative Productivity Channels for Aggregate Fluctuations
- A Search-Theoretic Monetary Business Cycle Model with Capital Formation
- Price-Level Determinacy, Lower Bounds on the Nominal Interest Rate, and Liquidity Traps
- Real Business Cycle Theory and the Great Depression: The Abandonment of the Abstentionist Viewpoint
- Topics Article
- Contracts and Money Revisited
- On the Use of Substitutability as a Measure of Competition
- Can the AK Model Be Rescued? New Evidence from Unit Root Tests with Good Size and Power
- How Tight Should One's Hands be Tied? Fear of Floating and the Credibility of Exchange Rate Regimes
- Uncertainty and Debt-Maturity in Emerging Markets
- Quantitative Monetary Easing and Risk in Financial Asset Markets
- Using Investment Data to Assess the Importance of Price Mismeasurement
- Biased Technical Change and Capital-Labour Substitution in Finland, 1902-2003
- Long-Run Money Growth and the Liquidity Effect
- Differentiability of the Efficient Frontier when Commitment to Risk Sharing is Limited
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- Human Capital Composition, R&D and the Increasing Role of Services
- The Allocation of Labor and Endogenous Search Decisions
- Bank Lending with Imperfect Competition and Spillover Effects
- Convergence Across Italian Regions and the Role of Technological Catch-Up
