UNSPECIFIED. (1997) The 'laissez faire' bias of managed floating. JOURNAL OF INTERNATIONAL MONEY AND FINANCE, 16 (6). pp. 989-1000. ISSN 0261-5606

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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
Date:	December 1997
Volume:	16
Number:	6
Number of Pages:	12
Page Range:	pp. 989-1000
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/16207

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