Why Do Countries Float the Way They Float?
Countries that are classified as having floating exchange rate systems (or very wide bands) show strikingly different patterns of behavior. They hold very different levels of international reserves and allow very different volatilities in the movements of the exchange rate relative to the volatility that they tolerate either on the level of reserves or in interest rates. We document these differences and present a model that explains them as the optimal response of a Central Bank that attempts to minimize a standard loss function, in an environment in which firms are credit-constrained and incomplete markets limit their ability to avoid currency mismatches. This model suggests that the difference in the way countries float could be related to their differing levels of exchange rate pass-through and differences in their ability to avoid currency mismatches. We test these implications and find a very strong and robust relationship between the pattern of floating and the ability of a country to borrow internationally in its own currency. We find weaker and less robust evidence on the importance of pass-through to account for differences across countries with respect to their exchange rate/monetary management.
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Format: | Working Papers biblioteca |
Language: | English |
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Inter-American Development Bank
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Subjects: | Capital Flow, Exchange Rate, F31 - Foreign Exchange, F33 - International Monetary Arrangements and Institutions, F41 - Open Economy Macroeconomics, emerging markets;WP-418;dollarization;exchange rate, |
Online Access: | http://dx.doi.org/10.18235/0010778 https://publications.iadb.org/en/why-do-countries-float-way-they-float |
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dig-bid-node-98892024-05-30T20:21:26ZWhy Do Countries Float the Way They Float? 2000-05-01T00:00:00+0000 http://dx.doi.org/10.18235/0010778 https://publications.iadb.org/en/why-do-countries-float-way-they-float Inter-American Development Bank Capital Flow Exchange Rate F31 - Foreign Exchange F33 - International Monetary Arrangements and Institutions F41 - Open Economy Macroeconomics emerging markets;WP-418;dollarization;exchange rate Countries that are classified as having floating exchange rate systems (or very wide bands) show strikingly different patterns of behavior. They hold very different levels of international reserves and allow very different volatilities in the movements of the exchange rate relative to the volatility that they tolerate either on the level of reserves or in interest rates. We document these differences and present a model that explains them as the optimal response of a Central Bank that attempts to minimize a standard loss function, in an environment in which firms are credit-constrained and incomplete markets limit their ability to avoid currency mismatches. This model suggests that the difference in the way countries float could be related to their differing levels of exchange rate pass-through and differences in their ability to avoid currency mismatches. We test these implications and find a very strong and robust relationship between the pattern of floating and the ability of a country to borrow internationally in its own currency. We find weaker and less robust evidence on the importance of pass-through to account for differences across countries with respect to their exchange rate/monetary management. Inter-American Development Bank Ricardo Hausmann Ugo Panizza Ernesto H. Stein Working Papers application/pdf IDB Publications Latin America en |
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Capital Flow Exchange Rate F31 - Foreign Exchange F33 - International Monetary Arrangements and Institutions F41 - Open Economy Macroeconomics emerging markets;WP-418;dollarization;exchange rate Capital Flow Exchange Rate F31 - Foreign Exchange F33 - International Monetary Arrangements and Institutions F41 - Open Economy Macroeconomics emerging markets;WP-418;dollarization;exchange rate |
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Capital Flow Exchange Rate F31 - Foreign Exchange F33 - International Monetary Arrangements and Institutions F41 - Open Economy Macroeconomics emerging markets;WP-418;dollarization;exchange rate Capital Flow Exchange Rate F31 - Foreign Exchange F33 - International Monetary Arrangements and Institutions F41 - Open Economy Macroeconomics emerging markets;WP-418;dollarization;exchange rate Inter-American Development Bank Why Do Countries Float the Way They Float? |
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Countries that are classified as having floating exchange rate systems (or very wide bands) show strikingly different patterns of behavior. They hold very different levels of international reserves and allow very different volatilities in the movements of the exchange rate relative to the volatility that they tolerate either on the level of reserves or in interest rates. We document these differences and present a model that explains them as the optimal response of a Central Bank that attempts to minimize a standard loss function, in an environment in which firms are credit-constrained and incomplete markets limit their ability to avoid currency mismatches. This model suggests that the difference in the way countries float could be related to their differing levels of exchange rate pass-through and differences in their ability to avoid currency mismatches. We test these implications and find a very strong and robust relationship between the pattern of floating and the ability of a country to borrow internationally in its own currency. We find weaker and less robust evidence on the importance of pass-through to account for differences across countries with respect to their exchange rate/monetary management. |
author2 |
Ricardo Hausmann |
author_facet |
Ricardo Hausmann Inter-American Development Bank |
format |
Working Papers |
topic_facet |
Capital Flow Exchange Rate F31 - Foreign Exchange F33 - International Monetary Arrangements and Institutions F41 - Open Economy Macroeconomics emerging markets;WP-418;dollarization;exchange rate |
author |
Inter-American Development Bank |
author_sort |
Inter-American Development Bank |
title |
Why Do Countries Float the Way They Float? |
title_short |
Why Do Countries Float the Way They Float? |
title_full |
Why Do Countries Float the Way They Float? |
title_fullStr |
Why Do Countries Float the Way They Float? |
title_full_unstemmed |
Why Do Countries Float the Way They Float? |
title_sort |
why do countries float the way they float? |
publisher |
Inter-American Development Bank |
url |
http://dx.doi.org/10.18235/0010778 https://publications.iadb.org/en/why-do-countries-float-way-they-float |
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AT interamericandevelopmentbank whydocountriesfloatthewaytheyfloat |
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