Many central banks whose exchange rate regimes are classified as flexible are reluctant to let the exchange rate fluctuate. This phenomenon is known as "fear of floating". We present a simple theory in which fear of floating emerges as an optimal policy outcome. The key feature of the model is...

This paper develops the view that monetary policy operates within a set of basic constraints that limit the set of outcomes that it can achieve.These include constraints on aggregate supply behavior that determine how a given path of nominal income growth will be divided between inflation and...

This paper finds that limited exchange rate flexibility in the form of "fear of appreciation" significantly slows adjustment of current account imbalances, providing novel support for Friedman's conjecture regarding exchange-rate flexibility. We present a new stylized fact: floaters have faster...

The "monetary trilemma" - the hypothesis that full monetary policy autonomy, exchange rate stability, and financial openness cannot simultaneously be achieved - has long been studied. Recently, holding international reserves (IR) has become an important policy instrument, insuring against...

Identifying exogenous variation in monetary policy is crucial for investigating central bank policy transmission. Using newly-collected archival real-time data utilized by the Central Bank Council of the German Bundesbank, we identify unexpected changes in German monetary policy from 580 policy...