Uncovering Central Bank's Monetary Policy Objectives: Going Beyond Fear of Floating

Abstract

Highly volatile exchange rate don't come cheap in economies with large liability dollarization ratios. Therefore, central banks do no follow a unique objective of price stability but its preferences include an implicit exchange rate objective. This gives us reasons to believe that the Peruvian exchange rate could be characterized as a phony floater. We found evidence suggesting an implicit defense on the level of the exchange rate. Going beyond the argument of fear of floating as a key explanation for this, we explore the reason behind the fear and the need of following certain objectives in liability dollarized economies.

Keywords: dollarization, floating exchange rates, central bank preferences, Peru

JEL Classification: C53, E52