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The 'laissez faire' bias of managed floating

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UNSPECIFIED (1997) The 'laissez faire' bias of managed floating. JOURNAL OF INTERNATIONAL MONEY AND FINANCE, 16 (6). pp. 989-1000.

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Abstract

The government of a small open economy trying to manage its exchange rate faces a 'time consistency' problem. If markets expect implementation of the optimal linear intervention rule, the government will be tempted to 'defect': knowing this, markets will expect less activism; and; in the discretionary equilibrium, this is what they get. How far this credibility problem can shift discretionary policy towards a free float is shown in two popular models of floating rates. One way of offsetting the 'laissez faire; bias of discretionary policy is to appoint a relatively 'conservative' central banker: but, as the time period of policy action and precommitment shrinks towards zero, the required conservative bias is found to go towards infinity. Other institutional features - such as central bank reputation, contracts and intermediate targets - may be crucial for successful exchange rate management. (C) 1997 Elsevier Science Ltd. All rights reserved.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
Journal or Publication Title: JOURNAL OF INTERNATIONAL MONEY AND FINANCE
Publisher: ELSEVIER SCI LTD
ISSN: 0261-5606
Official Date: December 1997
Dates:
DateEvent
December 1997UNSPECIFIED
Volume: 16
Number: 6
Number of Pages: 12
Page Range: pp. 989-1000
Publication Status: Published

Data sourced from Thomson Reuters' Web of Knowledge

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