A Theory of Fear of Floating / Javier Bianchi, Louphou Coulibaly.

Format:

Book

Author/Creator:

Bianchi, Javier.

Contributor:

National Bureau of Economic Research.

Coulibaly, Louphou.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30897.

NBER working paper series no. w30897

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

Many central banks whose exchange rate regimes are classified as flexible are reluctant to let the exchange rate fluctuate. This phenomenon is known as "fear of floating". We present a simple theory in which fear of floating emerges as an optimal policy outcome. The key feature of the model is an occasionally binding borrowing constraint linked to the exchange rate that introduces a feedback loop between aggregate demand and credit conditions. Contrary to the Mundellian paradigm, we show that a depreciation can be contractionary, and letting the exchange rate float can expose the economy to self-fulfilling crises.

Notes:

Print version record

January 2023.