A Case for Intermediate Exchange-Rate Regimes

This paper conducts a comprehensive empirical analysis to examine the stability of the overall system of exchange rates along two dimensions: does the choice of exchange rate regime help individual countries achieve their domestic macroeconomic goals? And does this choice of regime facilitate the country's interaction with the rest of the system? The empirical findings suggest that there is no universally "right" regime—pegged and intermediate regimes are associated with low nominal volatility and higher economic growth, especially for emerging market economies, and with deeper trade integration, which is growth enhancing. However, floating regimes imply a smoother external adjustment and lower susceptibility to financial crises. Individual countries should therefore tailor the choice of exchange rate regime according to their particular economic challenges, with the proviso that those opting for less flexible regimes should ensure strong macroeconomic fundamentals to ...

2011

Abstract: This paper provides a selective survey of the incidence, causes, and consequences of a country's choice of its exchange rate regime. I begin with a critical review of Michael Klein and Jay C. Shambaugh's (2010) book Exchange Rate Regimes in the Modern Era, and then proceed to provide an alternative overview of what the economics profession knows and needs to know about exchange rate regimes.

International Business & Economics Research Journal (IBER), 2011

The following paper is a summary article about the choice of exchange rate regime for a developing country considering the importance of currency mismatches, debt intolerance, and fear of floating, financial globalization, institutions and sudden stops. In this paper, I first summarize recent researches and papers on this specific issue. In a recent work of theirs, Calvo and Mishkin(2003) argue that much of the debate on choosing an exchange rate regime misses the boat and concludes that choice of exchange rate regime is likely to be of second order importance to the development of good fiscal, financial, and monetary institutions in producing macroeconomic success in emerging market countries and that a focus on institutional reforms rather than on the exchange rate regime may encourage emerging market countries to be healthier and less prone to the crises that we have seen in recent years. Another major study in this subject belong to Obtsfeld(2004) which claim that the measurable...

Journal of the Japanese and International Economies, 2001

Exchange Rate Regimes of Developing Countries: Global Context and Individual Choices This paper argues that, in analyzing the choice of exchange rate regimes in developing and transition countries in the present global economic context, it is essential to distinguish between those countries with substantial involvement in international financial markets and those where involvement is limited. For developing countries with important linkages to modern global capital markets, an important lesson of the recent crises in emerging market countries is that the requirements for sustaining pegged exchange rate regimes have become significantly more demanding. For many emerging market countries, therefore, regimes that allow substantial actual exchange rate flexibility are probably desirable. If supported by the requisite policy discipline and institutional structures, however, hard currency pegs may also be appropriate for some of these countries. Beyond the emerging markets countries, for many developing countries with less linkage to global capital markets, traditional exchange rate pegs and intermediate regimes are more viable and retain important advantages.

2016

This paper adopts and develops the 'fear of floating' theory to explain the decision to implement a de facto peg, the choice of anchor currency among multiple key currencies and the role of central bank independence for these choices. We argue that since exchange rate depreciations are passed through into higher prices of imported goods, avoiding the import of inflation provides an important motive to de facto peg the exchange rate in import-dependent countries. This study shows that the choice of anchor currency is determined by the degree of dependence of the potentially pegging country on imports from the key currency country and on imports from the key currency area, consisting of all countries which have already pegged to this key currency. The fear of floating approach also predicts that countries with more independent central banks are more likely to de facto peg their exchange rate since independent central banks are more averse to inflation than governments and can de facto peg a country's exchange rate independently of the government. Political economists argue that the choice of a fixed exchange-rate regime is driven by two main motivations (see, for example, Broz and Frieden 2006): By pegging their own currency to an 'anchor currency', governments can hope to 'borrow' the low inflation credibility of the anchor currency, which may help to fight domestic inflation. This is not the only positive consequence: a fixed exchange-rate also reduces the exchange-rate risk for internationally operating corporations, which reduces transactions costs and facilitates trade and foreign direct investment. At the same time, however, pegs also have adverse consequences. A peg with narrow bands largely reduces monetary policy autonomy and, especially for countries that peg to keep inflation at bay, increases the risk of a severe exchange-rate overvaluation. 1 Recently, Calvo and Reinhart (2002) have argued that countries may prefer stable exchange-rates 2 for a third reason: they reduce the volatility of the inflation rate and prevent 1 This can be derived from two complementary theories of exchange-rate regime choice known as time inconsistency theory and optimal currency area (OCA) theory, which are not the only, but the most popular of existing approaches. We discuss these theories in the discussion paper version of this manuscript in much greater detail (Plümper and Neumayer 2009), whereas here for space constraints we can only briefly summarize the literature and refer to the main contributions. Time inconsistency theories draw

This note summarizes some of the highlights of my longer paper with Guillermo Calvo"Fear of Floating." Many emerging market countries have suffered financial crises. One view blames soft pegs for these crises. Adherents to that view suggest that countries move to corner solutions-hard pegs or floating exchange rates. We analyze the behavior of exchange rates, reserves, and interest rates to assess whether there is evidence that country practice is moving toward corner solutions. We focus on whether countries that claim they are floating are indeed doing so. We find that countries that say they allow their exchange rate to float mostly do not-there seems to be an epidemic case of "fear of floating.

American Economic Review, 2000

2008

This paper presents, in the light of Keynesian theory and Keynes' ideas and taking in account the emerging economies reality in nowadays global world, an exchange rate regime proposal for emerging countries with the capability of mitigating their external vulnerability and fragility and their dependence on foreign capital, and thus making possible the implementation of domestic macroeconomic policies that would lead to high levels of output and employment. For this purpose the paper revisits Keynes' thinking and proposals with regard to both exchange rate policy and capital inflows, with a view to showing how they contribute to maintaining full employment, develops a Post Keynesian view on financial globalization and the behavior of exchange rate, and finally presents a strategy for an exchange rate regime with capital controls for emerging countries.

Journal of Money, Credit and Banking, 2008

This paper studies the empirical and theoretical association between the duration of a pegged exchange rate and the cost experienced upon exiting the regime. We confirm empirically that exits from pegged exchange rate regimes during the past two decades have often been accompanied by crises, the cost of which increases with the duration of the peg before the crisis. We explain these observations in a framework in which the exchange rate peg is used as a commitment mechanism to achieve inflation stability, but multiple equilibria are possible. We show that there are ex ante large gains from choosing a more conservative not only in order to mitigate the inflation bias from the well-known time inconsistency problem, but also to steer the economy away from the high inflation equilibria. These gains, however, come at a cost in the form of the monetary authority's lesser responsiveness to output shocks. In these circumstances, using a pegged exchange rate as an anti-inflation commitment device can create a "trap" whereby the regime initially confers gains in anti-inflation credibility, but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy. We also show that the more conservative is the regime in place and the larger is the cost of regime change, the longer will be the average spell of the fixed exchange rate regime, and the greater the output contraction at the time of a regime change.

Turkish Studies, 2003