Why Do Countries Float the Way They Float?

44 Pages Posted: 22 May 2000

See all articles by Ricardo Hausmann

Ricardo Hausmann

Harvard University - Harvard Kennedy School (HKS)

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics; CEPR

Ernesto Stein

Inter-American Development Bank (IDB)

Multiple version iconThere are 3 versions of this paper

Date Written: April 2000

Abstract

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 to the movements of the exchange rate relative to the volatility that they tolerate either on the level of reserves or on 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 cold be related to their differing levels of exchange rate pass-through and the differing 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.

Keywords: Exchange Rate, Emerging Markets, Dollarization

JEL Classification: F31, F33, F41

Suggested Citation

Hausmann, Ricardo and Panizza, Ugo and Stein, Ernesto Hugo, Why Do Countries Float the Way They Float? (April 2000). Available at SSRN: https://ssrn.com/abstract=223650 or http://dx.doi.org/10.2139/ssrn.223650

Ricardo Hausmann (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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HOME PAGE: http://www.hks.harvard.edu/about/faculty-staff-directory/ricardo-hausmann

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

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Geneva, 1202
Switzerland

CEPR ( email )

London
United Kingdom

Ernesto Hugo Stein

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States

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