Fear of Floating and Social Welfare
Tambakis, Demosthenes N.
Cambridge Working Papers in Economics
Faculty of Economics
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Tambakis, D. N. (2007). Fear of Floating and Social Welfare. https://doi.org/10.17863/CAM.5075
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.
Fear of Floating, Financial Stability, Policy Credibility, Emerging Market Economies
This record's DOI: https://doi.org/10.17863/CAM.5075
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