Exchange rate regimes and fiscal discipline: The role of trade openness

This study investigates the impacts of exchange rate regime (ERR) choice, economic, institutional, and demographic factors on the budget deficit. The recent literature states that fiscal discipline is affected by the ERR preferences in open economies. In this study, the effect of de facto ERR preferences on fiscal discipline were analyzed between 1995 and 2016 for 76 countries classified into income groups. The estimates by Feasible Generalized Least Squares and Panel Corrected Standard Errors estimators show that flexible ERRs provide much more fiscal discipline. The findings highlight the importance of institutional quality, demographic factors, and inflation to ensure fiscal discipline. A country with a high level of trade openness is more vulnerable to exchange rate shocks, which leads to uncertainty in the fiscal policy. The results confirm that ERR preferences affect countries' fiscal disciplines differently, depending on the countries' characteristics.

This paper is concerned with the factors that affect the choice of exchange rate and monetary regimes in Iceland. Iceland is a small open economy with a resource-based export sector. As such it has characteristics that give conflicting indications for the choice of an exchange rate regime. The choice of an exchange rate regime is not only conditioned by the structural characteristics of the economy. The parameters set by structural policies and the legal and political framework for monetary policy is also of importance. Financial liberalization, both internal and external, affects the exchange rate regime and the conduct of exchange rate policy and so does the Central Bank legislation and the relations between the Central Bank and other organs of economic policy making, especially the government. These issues will, therefore, be considered in this paper.

This paper studies two issues of countries’ exchange rate regime (ERR) choices: why countries peg and, if they peg, how they choose their anchor currency. Previous studies focus on the use of country-specific factors to explain countries’ exchange rate regime choices. However, though some papers found strong correlation between idiosyncratic factors and ERR choices, these factors cannot fully explain the contemporary movement of the choices. It is possible that large swings in regime choices are caused by network effects: a few countries change their ERR and other countries follow. If this snowball effect is true for countries’ decisions, we should be able to observe spatial autocorrelations among countries’ ERR choices. Using spatial analysis, we found that countries are likely to follow the ERRs of other countries, and countries’ ERRs are jointly determined by network effects and country-specific factors. The findings indicate that countries may achieve higher welfare by jointly choosing their ERRs with their major partners through cooperation and negotiation.

In the context of significant global economic turmoil and increasing financial, political and social risks leading to a decrease in aggregate demand worldwide and beyond, external competitiveness becomes a key variable in terms of the resumption of economic growth in Romania as integrated process in the aggregate evolution of the European economy. This paper aims to analyze the link between the exchange rate regime and international trade, in order to demonstrate whether there is an influence of the choice of exchange rate regime on the volume of trade. It also analyzes the influence of exchange rate volatility on international trade. The objectives of this research were: knowing the options for choosing an exchange rate regime; distinguishing the factors that determine the choice of an exchange rate regime; understanding the theories presented on exchange rate regimes; analysis of the impact of choosing an exchange rate regime in the countries of Central and South-Eastern Europe All data used in the paper were collected from articles, reports, summaries, statistics, books, but also official sites such as the International Monetary Fund or the Eurostat website. The data used were selected after deepening and understanding the ideas underlying the choice and influences of exchange rate regimes.

The choice of exchange rate regime has become one of the most important issues once more in many economies after the financial crises in recent years. In the wake of the financial crises, many countries, especially emerging market economies, opted for floating exchange rate regimes by forsaking the pegged regimes. Consequently, an old debate on the choice and determinants of exchange rate regimes has been triggered. Economists have started to debate what appropriate exchange rate regime for an economy is. When the tendency in recent years is taken into consideration, the choice of exchange rate regime of the countries, especially emerging economies, needs to be analyzed. To do this, in this paper, we attempt to uncover how emerging market economies choose their exchange rate regimes. In other words, we try to find the economic and political factors underlying the choice of exchange rate regimes. The study includes 25 emerging market economies over the period 1970-2006. We use random effect ordered probit model in order to find the long run economic and political determinants of exchange rate regimes for emerging economies. The determinants of both the de jure and de facto exchange regimes are empirically analyzed in the paper

Governance and economic growth: The role of the exchange rate regime

The exchange rate regime comprises the exchange rate arrangement and a number of complementary policies, including possible capital controls and monetary policy. The normative choice of an appropriate exchange rate regime must take into account many factors. Fixed exchange rates facilitate international trade, but may lead to more variability of output and employment. For emerging-market and transition economies, other factors such as export competitiveness, disinflation policies, maintenance of low inflation, and the credibility and administrative capacity of the authorities may be equally important. These features differ across countries and change over time. Empirical studies suggest that numerous factors are of importance for the choice of exchange rate regime, but also that the effects of the choice are difficult to pin down.

This paper looks at the recent history of East Asian exchange rate regimes in the context of the wider international discussion of exchange rates. It examines whether the exchange rate regimes were a cause of the crisis, or whether the crisis would have emerged under alternative exchange rate regimes. It focuses on the relationship between the exchange rate regime and the recovery process. It then asks whether exchange controls can help in maintenance of exchange rate and economic stability. The article concludes with a discussion of how the recent experience may affect future choice of exchange rate regimes. The sense of crisis in East Asia in the third quarter of 1997 was generated by the successive collapse of several Southeast Asian currencies, followed by the Korean won in the fourth quarter. The problems were later felt more generally as a financial and an economic crisis. There is a consensus amongst economists and policy makers that the exchange rate regimes that were applied in Southeast Asia and Korea immediately prior to the crisis were flawed, and contributed substantially to the catastrophic decline in economic output in the year or so from mid-1997. There is as yet no consensus on the exchange rate regimes that are most suited to the restoration of sustained growth through East Asia. By the mid-1990s, most East Asian economies had settled into de facto pegging of their currencies against the U.S. dollar. The pegs were articulated with varying degrees of commitment by the monetary authorities and sometimes but not always were accompanied by deliberately complementary domestic demand policies. A few of the pegs were supported by intrusive exchange controls. The main exception to the de facto peg was Japan, which had floated the yen ever since the breakdown of the Bretton Woods system of firmly fixed (but adjustable) exchange rates in the early 1970s. All currencies in the region had been through periods of floating rates or major changes of parity over the preceding two decades, before sliding into a de facto peg against the U.S. dollar. The shift to the de facto peg had occurred early in Hong Kong (in 1983, after a period of great volatility of a floating rate), and was most recent for Taiwan. The de facto pegs were mostly blown apart by the crisis, and succeeded by floating currencies. The floating rates were widely seen as being temporary, but the monetary authorities so far have had little to say about their likely longevity, or about the regimes that are likely to succeed them. The exceptions to the shift to floating rates are Hong Kong and China, which have staunchly and so far successfully defended the 1997 parities against the U.S. dollar; Vietnam, which has devalued its currency but moved to a lower, fixed rate; and Malaysia, which returned to a fixed parity, at a lower rate, in the third quarter of 1998, after a little over a year of major depreciation within a floating rate. This article looks at the recent history of East Asian exchange rate regimes in the context of the wider international discussion of exchange rates. It examines whether the exchange rate regimes were a cause of crisis, or whether the crisis would have emerged under alternative exchange rate regimes. It focuses on the relationship between the exchange rate regime and the recovery process. It then asks whether exchange controls can help in maintenance of exchange rate and economic stability. The article concludes with discussion of how the recent experience may affect future choice of exchange rate regimes. Exchange Rates: Evolving Regimes in International Perspective Most East Asian economies were members of the global system of fixed exchange rates until the collapse of the Bretton Woods system in the early 1970s. Some were comfortable members, while others had great difficulty in reconciling a fixed exchange rate against major world currencies with its implications for domestic demand management. …

This lecture deals with the problem of the choice of exchange rate regime for fiat and fully convertible currencies. We begin with a review of different types of exchange rate regimes and discuss the difference between de jure and de facto regimes. We also briefly talk about how classification of exchange rate regimes leads to different interpretations of the relationship between regime and macroeconomic performance. Afterwards we give a short discussion of the vanishing intermediate exchange rate regime hypothesis. In the second part of the lecture we mention five different approaches to the choice of the optimal exchange rate regime and provide a general overview of the literature on optimum currency areas.

Too Sensational: On the Choice of Exchange Rate Regimes By W. Max Corden. Cambridge, MA: MIT Press. 2002. Pp. xiv, 274. $29.95.This volume is the 10th in the series of Ohlin lectures initiated in 1988 at the Stockholm School of Economics. This volume, like the others (the first of which was Bhagwati's 1988 lively Protectionism) is characterized by clear and imaginative thought with no equations. Corden describes his method as story telling informed by theory (p. xiii). The jacket of Bhagwati's book was a cartoon from Punch, which showed the British Prime Minister being led to free trade. My choice for the jacket of this book would have been something like The Economist's November 28, 1968, cover, which showed the heads of Charles DeGaulle, Richard Nixon, and Harold Wilson bobbing among the waves, with the caption It's much better to float. That is the message of the book for most countries: floating is better than a fixed-but-adjustable exchange rate regime, or a FBAR, to use Corden's abbreviation.Instead, the jacket of the book displays the quote from Oscar Wilde's The Importance of Being Earnest that introduced one of the chapters in an early edition of Samuelson's textbook. Cecily, you will read your Political Economy in my absence. The chapter on the Fall of the Rupee you may omit. It is somewhat sensational. Even these metallic problems have their melodramatic side. Since my introductory course in economics, I had wondered about what that quote meant. Now 42 years later, I discover that the rupee had been pegged to silver, the pound to gold, and when the price of silver plummeted in the 1870s, the rupee depreciated. Indian goods became more competitive, creating competitiveness problems for British industry, and the home charges, which India had to take to Britain, were denominated in sterling, creating fiscal problems for India. Corden notes that the more recent FBARs have also been too sensational (p. x). This is his way of saying it is important to keep exchange rates in line with fundamentals, or It's much better to float.Corden credits Ohlin with seeing clearly in 1931 the importance of adjusting the Swedish Kroner in order to stabilize the Swedish price level, yet another contribution in addition to his ideas on the factor price equalization theorem and the transfer problem, and his service as leader of Sweden's liberal party for 34 years. Corden quotes Keynes in 1923 as favoring price level stability as more important than exchange rate stability and believing that the most cogent rationale for a gold standard was the rather weak discipline argument, strapping down Ministers of Finance (p. 13).Corden reminds us of core ideas about exchange rate regimes. For example, there is Milton Friedman's point that there is a presumption that currency speculation will be stabilizing, for destabilizing speculation is unprofitable. He laments the jerkyness of FBARs. He suggests that either flexible nominal wages or inflexible real wages creates an overwhelming case for an absolutely fixed (exchange rate) regime. In the former case, exchange rate change is not needed to maintain competitiveness, and in the latter it is not useful. A peg to an individual currency is preferable to pegging to a currency basket in that the former saves transaction costs and is easier to monitor. What follows is a collection of Corden's insights that 1 found particularly interesting.Not many economists living in the real world would dispute that in the short run there is some degree of sluggishness downward of nominal wages in most, if not all, countries (p. 89). And based on overwhelming empirical evidence, Keynesian analysis and policies as presented here are still appropriate for short-to-medium-term situations (p. 90). Also, the Barro-Ricardo complication that forward-looking tax payers will offset fiscal actions is only partial at best, leaving Keynesian demandside prescriptions in tact. …

This paper comprehensively investigates the effect of government ideology on the type of exchange rate regime that a country implements via multinomial logit and multinomial probit models for 147 countries in the period 1974–2009. Our results clearly indicate that a left‐wing government increases the likelihood that a country implements a flexible regime in the classifications of exchange rate regimes. Nevertheless, evidence is weaker when using the de jure IMF course classification, which is set up by Ilzetzki et al. (). In a deeper investigation, we find that left‐wing governments are more likely to choose a flexible regime relative to a fixed one in our sample of OECD, non‐OECD and non‐Eurozone countries, as the impacts from government ideology on the determinant of the choice of exchange rate regime in Eurozone countries disappear. More importantly, we present many explanations for exchange rate regime choices when macroeconomic conditions, political constraints and institutions impact the choice of exchange rate regime.

The choice of exchange rate regime is the most relevant decision in the economic world that has to be faced by the economic authority until now. Exchange rate regime that is applied by one country become a controversial debate after the Asia’s crisis in the year 1997-1998, especially for developing countries and emerging economies in Asia. The purpose of this research is to see the impact of export diversification, intensive margin and extensive margin to the choice of the exchange rate regime in nine emerging and developing countries in Asia 1991-2014.This research uses the panel logistic regression model to analyze the two model that are used in the research; they are: model 1 (the impact of export diversification to the exchange rate regime),and model 2 (the impact of extensive margin and intensive margin to the exchange rate regime. To avoid and to lessen the chances of endogeneity problem therefore, all of the independent variables and the control variable must be lagged in one period.The results of the regression shows that export diversification have a significant positive impact on the exchange rate regime. When export diversification is decomposed into intensive margin and extensive margins, the result shows that the extensive margins also have a significant positive impact towards the exchange rate regime, while the intensive margin does not show any significant impact towards the exchange rate regime choice. Keywords: exchange rate regime, export diversification, intensive margin, extensive margin, emerging and developing countries in Asia.

Most of the literature on exchange rate regimes has focused on the developed countries. Since the recent crises in emerging markets, however, attention has shifted to the choice of exchange rate regimes for developing countries, especially those that are more integrated into the world capital markets. In Too Sensational, W. Max Corden presents a systematic and accessible overview of the choice of exchange rate regimes. Reviewing many types of regimes, he shows how the choice of an exchange rate regime is related to both fiscal policy and trade policy.Building on the theory of optimum currency areas, Corden develops an analytic framework of three approaches (nominal anchor, real targets, and exchange rate stability) and three polar exchange rate regimes (absolutely fixed, pure floating, and fixed but adjustable). He considers all other regimes to be mixtures of two or three of the polar regimes.Beginning with theory and later turning to case studies of countries in Asia, Europe, and Latin America, Corden focuses on how economies react to negative and positive shocks under various exchange rate regimes. He examines in particular the Asian and Latin American currency crises of the 1990s. He concludes that although too sensational crises have discredited fixed but adjustable regimes, the extremes of absolutely fixed regimes or pure floating regimes need not be chosen.

Fiscal Discipline & Exchange Rate Regimes': A Case for Currency Boards

The creation of a monetary union has been the primary objective of the Gulf Cooperation Council (GCC) members since the early 1980s. Significant progress has already been made in regional economic integration: The GCC countries have largely unrestricted intraregional mobility of goods, labor, and capital; regulation of the banking sector is being harmonized; and in 2008 the countries established a common market. Further, most of the convergence criteria established for entry into a monetary union have already been achieved. In establishing a monetary union, however, the GCC countries must decide on the exchange rate regime for the single currency. The countries’ use of a US dollar peg as an external anchor for monetary policy has so far served them well, but rising inflation and differing economic cycles from the United States in recent years has raised the question of whether the dollar peg remains the best policy.Mohsin Khan considers the costs and benefits of alternative exchange rate regimes for the GCC. These include continued use of a dollar peg, a peg to a basket of currencies such as the SDR or simply the dollar and euro, a peg to the export price of oil, and a managed floating exchange rate. In light of the structural characteristics of the GCC countries, Khan considers the dollar peg the best option following the establishment of a GCC monetary union. The peg has proved credible and is easy to administer. If further international integration in trade, services, and asset markets makes a higher degree of exchange rate flexibility desirable in the future, implementing a basket peg could provide this flexibility. Regardless, the choice of exchange rate regime for the GCC countries need not be permanent: The countries could initially peg the single GCC currency to the US dollar and then move to a more flexible regime as their policy needs and institutions develop.