Original Sin, Passthrough, and Fear of Floating

In this paper we consider a set countries with a de jure floating exchange rate and show that there are substantial differences in their exchange rate policies. In particular, we explore how the ability to borrow in own currency and the degree of passthrough from exchange rate to prices affect the degree of exchange rate management. We find strong evidence for a negative link between exchange rate flexibility and ability to borrow in own currency, and a much weaker link between passthrough and exchange rate flexibility.

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