Inflation Targeting or Fear of Floating in Disguise : A Broader Perspective

This paper modifies Calvo and Reinhart's (2002) fear of floating analysis to distinguish between de facto inflation targeting (IT) and fear of floating (FF) behavior in a sample of 10 de jure inflation targeting countries. We present three main findings. 1) The standard approach misclassifies many countries and this misclassification is persistent across countries. 2) The modified analysis tends to better distinguish between IT and FF regimes. Since the modified analysis is not much more difficult, and reveals valuable information, it seems reasonable to recommend it when classifying countries' regimes according to behavior. 3) Based solely on their use of international reserves, most countries are classified as FF. Nevertheless, when compared to the standard definition of fixers and floaters, IT countries are more similar to floaters than fixers, lending some support to the common reference to IT countries as having floating exchange rate regimes