De Facto Exchange Rate Regimes Research Articles

Mexico versus Canada: Stability benefits from making common currency with USD?

This paper explores the potential stability benefits from monetary union by examining volatility of PPP–GDP per capita and per hour under various de facto exchange rate regimes. It finds that, for Mexico unlike Canada, volatility is much greater during periods when the nominal dollar exchange rate changes appreciably than when it is quasi-pegged. Since Mexico is not in a position to run a credible peg, it must seek greater stability through dollarization. This finding suggests that the stability benefits of monetary union are greatest for emerging-market countries inside an economically integrating region and non-existent for financially highly advanced countries.

Does exchange rate regime explain differences in economic results for Asian countries?

The paper aims at determining whether exchange rate regimes have an impact on inflation and growth for a sample often major Asian countries for the period 1990:01–2001:04. First, we try to improve upon existing de facto classifications and propose a new statistical method for identifying de facto exchange rate regimes: observations are classified into four categories: float, managed float, crawling peg and peg. The procedure includes several successive steps: taking into account the trends in the exchange rate levels, comparing the variances in the exchange rates and forex reserves changes to a benchmark sample of floating currencies. Devaluation periods are also identified. This method yields quarterly results that are checked to be consistent with common knowledge. Second, we use this classification for assessing the effects of exchange rates regimes on inflation and growth. We perform pooled regressions with lagged exchange rate regimes dummies and several control variables. Results show that pegs are associated with weaker growth than floating exchange rate regimes. Results on inflation are more questionable, as an endogeneity bias is not excluded.

On the Road: The Path of Bulgaria, Croatia and Romania to the EU and the Euro

Click to increase image sizeClick to decrease image size Notes For a literature survey on equilibrium exchange rate estimation with a focus on the new EU member states, see e.g. Égert (2003 Égert, B. 2003. Assessing Equilibrium Exchange Rates in CEE Acceding Countries: Can We Have DEER with BEER without FEER? A Critical Survey of the Literature. Focus on Transition, 2: pp. 38 – 106 [Google Scholar]). Apart from the three countries covered in this article the Former Yugoslav Republic of Macedonia and Turkey have also submitted formal applications for EU membership, with Turkey having official candidate status since December 1999. An exchange rate is regarded as misaligned if its actual values persistently deviate from its equilibrium trend. See Fidrmuc & Korhonen (2003 Fidrmuc, J and Korhonen, I. 2003. Similarity of Supply and Demand Shocks Between the Euro Area and the CEECs. Economic Systems, 27, 3: pp. 313 – 334 [Google Scholar]) for an analysis of the correlation in underlying demand and supply shocks between the euro area and the Central and Eastern European countries. Under a currency board, a fixed conversion rate is set between the local and a foreign currency and the domestic monetary base is fully backed by low-risk assets denominated in the foreign currency. The currency board has no right to issue central bank money against any domestic assets. The full working paper version (see Reinhart & Rogoff, 2002 Reinhart CM Rogoff KS The Modern History of Exchange Rate Arrangements: A Reinterpretation NBER, Cambridge, Working Paper 8963 2002 [Google Scholar]) includes also detailed country-specific information on de facto exchange rate regimes. For a discussion on the pros and cons of euroisation in Europe see for example Begg et al. (2003 Begg D Eichengreen B Halpern L von Hagen J Wyplosz C Sustainable Regimes of Capital Movements in Accession Countries Policy Paper 10, CEPR, London 2003 [Google Scholar]). During the 1990s the European Community and its member states progressively concluded Association Agreements, so-called ‘Europe Agreements’, with ten countries of Central and Eastern Europe. The Europe Agreements provided the legal basis for bilateral relations between these countries and the EU. The Balassa – Samuelson effect is a common explanation for the fact that inflation tends to be higher in countries in an earlier stage of economic development. Assume a country with two sectors, an open sector producing tradable goods and a closed sector producing non-tradable goods. Given that wages are assumed to be linked to labour productivity in the open sector and because wages are expected to equalise across sectors, the price level of the closed sector is determined by the productivity level prevailing in the open sector. See Égert & Lommatzsch (2004 Égert B Lommatzsch K Equilibrium Exchange Rates in the Transition: The Tradable Price-Based Real Appreciation and Estimation Uncertainty William Davidson Institute, Michigan, Working Paper 676 2004 [Google Scholar]) and Crespo-Cuaresma et al. (2005 Crespo-Cuaresma, J, Fidrmuc, J and MacDonald, R. 2005. The Monetary Approach to Exchange Rates in the CEECs. Economics of Transition, 13, 2: pp. 395 – 416 [Google Scholar]) for a discussion on the use of the CPI-to-PPI ratio as a proxy of the Balassa – Samuelson effect in Central and Eastern European economies. In June 2004 Estonia and Lithuania joined ERM II with their existing currency board arrangements based on the euro in place. This move imposes unilateral commitments on these countries, while entailing no obligations for the European Central Bank. When interpreting the results, we should keep in mind that exchange rate misalignments estimated on the basis of panel data tend to show higher volatility than those directly based on the individual time series (see e.g. Égert & Halpern, 2004 Égert B Halpern L Equilibrium Exchange Rates in Central and Eastern Europe on the Eve of the Euro: New Insights from Meta-Analysis paper presented at the tenth Dubrovnik economic conference 2004 [Google Scholar]). This conclusion is, however, sensitive to the specification of the constant term in the simulation, which was discussed above. By contrast, alternative derivations of the constant term would result in inconsistent behaviour of the exchange rate, especially during the currency crisis in 1997. Additional informationNotes on contributorsJesús Crespo-CuaresmaWe would like to thank Stephan Barisitz, Vivek Dehejia, Balázs Égert, Doris Ritzberger-Grünwald and an anonymous referee, as well as the participants of the Hohenheim Sommer University 2004 for helpful comments and discussions. Our special thanks go to Andreas Nader for his assistance in data search and Susanne Steinacher for her linguistic support. The views expressed in this contribution are those of the authors and do not necessarily represent the position of the Oesterreichische Nationalbank.

De facto and official exchange rate regimes in transition economies

This paper provides an empirical investigation on the discrepancies between official and de facto exchange rate regimes in transition economies. We use a probit model to describe the determination of regime discrepancies. We find that “errors” in the selection of official regimes as well as the macroeconomic developments calling for conflicting adjustments in exchange rate regimes are important determinants of regime discrepancies.

Monetary and Exchange Rate Stability at the EU Mediterranean Borders

Stabilizing the exchange rate is a major monetary policy goal in a number of Mediterranean countries. We present a microstructure model of the foreign exchange market based on technical trading that allows us to categorize de facto exchange rate regimes and to derive a market based measure of the credibility of these exchange rate regimes. In our empirical analysis we compare the exchange rate policies of seven non European Mediterranean countries, Algeria, Egypt, Israel, Libya, Morocco, Turkey and Tunisia, with the benchmark of four European non EU countries namely Albania, Bulgaria, Croatia, and Romania. Our results indicate that the fundamental volatility of the market based exchange rates is quite moderate and that markets assign a moderate degree of credibility to the exchange rate management of most of the countries.

The Credibility of CIS Exchange Rate Policies: A Technical Trader's View

Stabilizing the exchange rate is a major monetary policy goal in a number of CIS countries. We present a microstructure model of the foreign exchange market based on technical trading that allows us to categorize the de facto exchange rate regimes and derive a market based measure of the credibility of these exchange rate regimes. In our empirical analysis we compare the exchange rate policies of Belarus, Kazakhstan, Russia and Ukraine with the benchmark of three potential candidates for an EU accession, namely Bulgaria, Romania and Turkey. Our results indicate that markets assign a relatively high degree of credibility to the exchange rate management of the CIS countries. The paths to credibility, however, were quite different. Stabilizing the exchange rate is a major monetary policy goal in a number of CIS countries. We present a microstructure model of the foreign exchange market based on technical trading that allows us to categorize the de facto exchange rate regimes and derive a market based measure of the credibility of these exchange rate regimes. In our empirical analysis we compare the exchange rate policies of Belarus, Kazakhstan, Russia and Ukraine with the benchmark of three potential candidates for an EU accession, namely Bulgaria, Romania and Turkey. Our results indicate that markets assign a relatively high degree of credibility to the exchange rate management of the CIS countries. The paths to credibility, however, were quite different.

Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

We test the hypothesis of a link between exchange rate policy and sovereign bonds. We analyze the effect of exchange rate policies on supply and credit spreads of sovereign bonds issued by developing countries. An exchange rate policy is captured by the de facto exchange rate regime and the real exchange rate misalignment. The main findings are: (1) real exchange rate overvaluation significantly increases sovereign bond issue probability and raises bond spreads; (2) spreads and the likelihood of issuing bonds depend on the exchange rate regime; (3) exchange rate misalignment under a hard peg significantly increases bond spreads; (4) in time of debt crises, exchange rate policy also greatly affects the sovereign bond market, especially through exchange rate overvaluation.

The Evolution of Exchange Rate Regimes Since 1990: Evidence from de Facto Policies

This paper presents a monthly database on de facto exchange rate regimes that covers all IMF members since 1990. Information from IMF country reports and other sources, including exchange rate data, is utilized to determine de facto exchange rate policies. Countries are categorized based on these policies using the IMF nomenclature adopted in 1999. This approach ensures the forward compatibility of the database. The database is then used to examine whether the view of exchange regimes holds with de facto regimes. It is found that the proportion of countries adopting intermediate regimes has indeed been shrinking in favor of greater flexibility or greater fixity, especially for countries more integrated with international markets. Analyses based on Markov chains of regime transitions, however, provide (mixed) evidence against the bipolar view.

The Evolution of Exchange Rate Regimes Since 1990

This paper presents a monthly database on de facto exchange rate regimes that covers all IMF members since 1990. Information from IMF country reports and other sources, including exchange rate data, is utilized to determine de facto exchange rate policies. Countries are categorized based on these policies using the IMF nomenclature adopted in 1999. This approach ensures the forward compatibility of the database. The database is then used to examine whether the view of exchange regimes holds with de facto regimes. It is found that the proportion of countries adopting intermediate regimes has indeed been shrinking in favor of greater flexibility or greater fixity, especially for countries more integrated with international markets. Analyses based on Markov chains of regime transitions, however, provide (mixed) evidence against the bipolar view.

The Evolution of Exchange Rate Regimes Since 1990 Evidence from De Facto Policies

This paper presents a monthly database on de facto exchange rate regimes that covers all IMF members since 1990. Information from IMF country reports and other sources, including exchange rate data, is utilized to determine de facto exchange rate policies. Countries are categorized based on these policies using the IMF nomenclature adopted in 1999. This approach ensures the forward compatibility of the database. The database is then used to examine whether the bipolar view of exchange regimes holds with de facto regimes. It is found that the proportion of countries adopting intermediate regimes has indeed been shrinking in favor of greater flexibility or greater fixity, especially for countries more integrated with international markets. Analyses based on Markov chains of regime transitions, however, provide (mixed) evidence against the bipolar view.