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How should emerging economies float their currencies?

Larraín, Felipe and Velasco Branes, Andres (2004) How should emerging economies float their currencies? Economics of Transition, 10 (2). pp. 365-392. ISSN 0967-0750

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Identification Number: 10.1111/1468-0351.00116

Abstract

Floating exchange rates seem to be gaining ground in Latin America, East Asia and the transition economies. The recent crises left many economies with no alternative but to float. Others have moved toward floating, searching for greater flexibility and insulation from external shocks. The question for most emerging market economies, then, is no longer to float or not to float, but how to float. Four issues arise in this regard. The first is how to float and have low inflation. The second is whether floating provides as much insulation as conventional theory predicts, especially in the presence of dollarized liabilities. Which leads to the third point: the relationship between the stability of the exchange rate and that of the financial system. The fourth is how to conduct monetary policy under a float, and the role of inflation targeting. We consider each of these points in turn, and conclude that a workable model of how to float seems to be emerging from the so-far successful experience of countries like Chile and Brazil. It involves the adoption of an inflation target as the main anchor for monetary policy, coupled with a monetary policy reaction function that - aside from reacting to the output gap and other determinants of the inflation rate - reacts also partially to movements in the nominal exchange rate.

Item Type: Article
Official URL: https://onlinelibrary.wiley.com/journal/14680351
Additional Information: © 2003 John Wiley & Sons
Divisions: School of Public Policy
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Subjects: H Social Sciences > HG Finance
Date Deposited: 14 Oct 2019 15:48
Last Modified: 19 Nov 2019 13:52
URI: http://eprints.lse.ac.uk/id/eprint/102092

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