Abstract
Abstract This paper investigates inconsistencies between countries’ official exchange rate regime declarations (the so-called de jure exchange rate regimes) and their actual policy (de facto exchange rate regimes). These exchange rate regime gaps decrease the credibility of monetary policy and are considered an overall negative economic phenomenon. In this paper, I attempt to disclose the determinants of these gaps using the data on several de facto classifications and a wide array of explanatory variables of economic and institutional nature. The results suggest that a number of macroeconomic factors such as foreign exchange reserves, current account balance and economic openness influence the probability of monetary authorities breaking commitment to their official exchange rate regime. At the same time, I also discover that the exchange rate regime gaps are less frequent in more democratic and institutionally advanced countries although the results tend to differ depending on the de facto classification used and the nature of gap (either de jure floating – de facto fixed or de jure fixed – de facto floating).
Highlights
Every IMF member country is required to declare an exchange rate regime (ERR), with information on those regimes presented in the IMF’s annual reports
Its cogent brief summarization can be found in Bleaney, Tian and Yin (2016): “focusing on the tails of distribution of monthly exchange rate changes against a reference currency, ERR is classified as peg when the 80 % of observations fall within the range ±0,01; while the ERR is stated as band when 80 % of observations are in range of ±0,02”
There is only a handful of papers (Alesina and Wagner, 2006; Guisinger and Singer, 2010; Bearce, 2014) that attempt to estimate the determinants of ERR gaps, but they are either outdated or employing a questionable methodology based on the premise that the ERR gaps’ nature is purely institutional
Summary
Every IMF member country is required to declare an exchange rate regime (ERR), with information on those regimes presented in the IMF’s annual reports. We cannot deny the existence of such situations, there are reasons to believe that a large portion of ERR gaps results from unfavourable economic developments when monetary authorities are forced to adjust their ER policy (meaning to allow their ERs to behave the way they are officially not “supposed to”) in order to prevent a possible impact of ERR on the economy if left unattended These may be the cases of both “fear of floating” (country stabilizing their nominally floating ER during economic turbulence) and “fear of pegging” (country letting their fixed ER loose when no more able to preserve it); and they could be emerging not from the monetary authorities’ free will, nor are they desirable[3]. We present the results and discuss the limitations of the research
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