Choice Of Exchange Rate Regime Research Articles

The economic determinants of the choice of an exchange rate regime: a probit analysis

Probit models were used to analyze the choice of exchange rate regimes by developing countries in the period 1977–1995. The results show the preeminence of criteria postulated in the theory of optimum currency areas, i.e., individual structural characteristics.

The Exchange-Rate Regime in the Transition Period

The exchange rate has a fundamental but dual role in the process of macroeconomic adjustment in the transition to a market economy: on the one hand, it sets the level of international competitiveness; on the other, it plays a key role in preserving macroeconomic stability. The authorities therefore face a serious trade-off: exchange-rate depreciation may induce higher international competitiveness in the short run, but it increases domestic inflationary pressures, and vice versa. This paper argues that the exchange-rate regime and exchange-rate policy did indeed play a crucial role in determining the patterns of macroeconomic adjustment in transition economies in the 1 990s. Transition countries were confronted with a number of important policy questions: which exchange-rate regime to adopt; how to evaluate the equilibrium exchange rate, and which criteria to use; what the magnitude and path of the initial adjustment in their exchange rates should be; and how to return to convertibility. Unfortunately, there is no single, straightforward answer. A variety of different types of exchange arrangement are possible, ranging from more or less permanently fixed rates to freely floating rates. Many countries started with severely depleted foreign-exchange reserves, which effectively dictated the choice of exchange-rate regime. This

Macroeconomic Performance Under Alternative Exchange Rate Regimes: Does Wage Indexation Matter?

This paper reexamines the macroeconomic effects of wage indexation in an open economy under alternative exchange rate regimes. The main finding is that, once the lags in actual indexation rules are considered, wage indexation affects output behavior substantially less than posited in the previous academic literature. This result implies that the academic view that wage indexation makes a flexible exchange rate generally preferable is unwarranted and suggests that the choice of exchange rate regime with and without wage indexation depends on similar factors. The analysis also reveals that the net effects of wage indexation on macroeconomic stability are ambiguous.

The Macroeconomic Consequences of Wage Indexation Revisited

Since the mid-1970s, there has been considerable research on the macroeconomic consequences of wage indexation. Nonetheless, until recently, this research had not explicitly explored the implications of contracts that index wages to lagged inflation, the usual type of wage indexation observed in practice. Drawing mainly on recent research by the author, this paper examines the consequences of wage indexation to lagged inflation on aggregate wage formation, the cost of disinflation under money- and exchange-rate-based stabilization, the variability of output under alternative shocks and policy regimes, the choice of exchange rate regime, and the level and variability of inflation.

The Macroeconomic Consequences of Wage Indexation Revisited

Since the mid-1970s, there has been considerable research on the macroeconomic consequences of wage indexation. Nonetheless, until recently, this research had not explicitly explored the implications of contracts that index wages to lagged inflation, the usual type of wage indexation observed in practice. Drawing mainly on recent research by the author, this paper examines the consequences of wage indexation to lagged inflation on aggregate wage formation, the cost of disinflation under money- and exchange-rate-based stabilization, the variability of output under alternative shocks and policy regimes, the choice of exchange rate regime, and the level and variability of inflation.

Macroeconomic Performance Under Alternative Exchange Rate Regimes: Does Wage Indexation Matter?

This paper reexamines the macroeconomic effects of wage indexation in an open economy under alternative exchange rate regimes. The main finding is that, once the lags in actual indexation rules are considered, wage indexation affects output behavior substantially less than posited in the previous academic literature. This result implies that the academic view that wage indexation makes a flexible exchange rate generally preferable is unwarranted and suggests that the choice of exchange rate regime with and without wage indexation depends on similar factors. The analysis also reveals that the net effects of wage indexation on macroeconomic stability are ambiguous.

The Choice of Exchange Rate Regime

In the 1990s, UK policy towards the exchange rate shifted from an attempt to be part of an ERM committed to narrow exchange rate bands to a monetary policy where the exchange rate has no explicit role. In particular, during the latter half of 1996 and the beginning of 1997 Sterling appreciated substantially, and yet the Bank of England continued to suggest that interest rates needed to rise to meet inflation targets.1 However, the government has not ruled out the possibility of irrevocably fixing its exchange rate against key European currencies by joining a European Monetary Union. Dramatic shifts in policy towards the exchange rate are not unusual historically.2 These shifts, like recent changes in UK policy, give the impression that governments should either fix the exchange rate or ignore it. Although textbook discussions of exchange rate policy often compare these two extremes, in reality compromise positions are possible and have been pursued in the past. What I shall describe as ‘weak exchange rate targeting’ can be implemented either in the form of wide currency bands,3 or if the exchange rate appears as an argument in an (explicit or implicit) interest rate reaction function.

The Choice of Exchange Rate Regime

The Choice of Exchange Rate Regime

Exchange Rate Regime Choice and Economic Performance in the Interwar Years

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Trojan horses: Putnam, ECU linkage and the EU ambitions of Nordic elites

This article argues that the decision by Nordic elites to link their respective currencies to an ECU basket is consistent with a Trojan horse strategy for membership in the European Union. After alternative explanations for ECU linkage are tested, the article shows how Nordic elites used their control over exchange rate regime choices to facilitate greater EU participation, in spite of the hesitancy voiced by domestic constituents. In order to make the argument, Putnam's two-level metaphor is amended to accommodate a bargaining situation where negotiators have independent policy preferences. This amended model provides seven lessons for negotiators willing to manipulate win-set contours with an eye toward affecting public support. These lessons are then juxtaposed with the Nordic decisions to link their currencies to an ECU basket. The article concludes that ECU linkage can be explained in terms of, and is consistent with, a strategy based on the EU ambitions of Nordic political elites.

Exchange rate policies during transition from plan to market

AbstractThis paper reviews the exchange rate policies adopted in the early years of transition, paying attention to the dilemmas concerning the degree of convertibility, the initial choice of exchange rate regime and the required scale of devaluation. The initial liberalization and devaluation were then followed by a period of real exchange rate appreciation, which was accompanied by improving export performance; this second phase has policy implications that are briefly discussed. Throughout, a key constraint is the inability of the central bank to target simultaneously monetary aggregates, interest rates and the exchange rate. In the presence of large capital inflows the authorities have to manage the exchange rate and domestic monetary policy in order to keep inflation acceptably low while maintaining international competitiveness.

Fiscal discipline and the choice of exchange rate regime

The conventional wisdom claims that fixed exchange rates provide more fiscal discipline than do flexible rates, but the recent experience in Europe, the record of Sub-Saharan countries in the 1980s and the history of stabilization attempts in Latin America cast empirical doubts on this wisdom. We present a standard intertemporal model with perfect capital mobility and price flexibility in which fiscal policy is endogenously determined by a maximizing fiscal authority. The model shows that the difference between regimes lies in the intertemporal distribution of the costs of fiscal laxity. Fixed rates push these costs into the future, while flexible rates allow the effects of unsound fiscal policies to manifest themselves immediately through movements in the exchange rate. Which system provides more discipline depends on the authorities' discount rate.

Comment on “Measuring the Independence of Central Banks and Its Effect on Policy Outcomes” by Cukierman, Webb, and Neyapti

Cukierman, Webb, and Neyapti (1992) significantly broadened and deepened the empirical study of the link between central bank independence and inflation per- formance. They considered evidence for a group of countries much bigger than any examined previously, most of the additions being developing countries, and they-constructed a range of new indicators of independence based on central bank law, the results of a questionnaire, and the turnover rate of central bank gover- nors. In interpreting their findings, however, they appeared to add a further, new dimension to this subject but without examining the dimension's wider implica- tions. Almost as an afterthought, Cukierman, Webb, and Neyapti suggested that a country's choice of exchange rate regime might have some bearing on their results. Here I extend the analysis to show that a systematic examination of exchange rate-fixing arrangements can play a role in both accounting for the pattern of inflation rates across their sample of developing countries and sharpening the as- sociation between central bank independence and inflation performance.

THE POLITICAL CHOICE OF THE EXCHANGE RATE REGIME*

The purpose of this paper is to present a model in which the choice of the optimal exchange rate regime is envisaged in a political setting. We consider a country whose voting population comprises three types of agents, importers, exporters and speculators, who select their position on exchange rate policy according to welfare maximization. As a result, well‐defined interest groups are shown to emerge. Each coalition makes contributions to one of two political candidates running for political office in support for their optimal policy intervention. When policy pronouncements by the two candidates are made in terms of exchange rate volatility, the equilibrium consists of two extremes: a fixed versus flexible exchange regime, the latter with bounded volatility [JEL D72, F31].

Optimal and Sustainable Exchange Rate Regimes: A Two-Country Game-Theoretic Approach

This paper attempts to identify optimal and sustainable exchange rate regimes in a world economy comprising two countries. By developing a Barro-Gordon two-country macroeconomic model, noncooperative equilibria are obtained under different assumptions of monetary policy commitments and different exchange rate regimes. Then, using a three-stage game approach to the strategic choice of monetary policy instruments, optimal and sustainable exchange rate regimes are identified. Determining such regimes depends fundamentally on the authorities' ability to make monetary policy commitments. The results indicate that international coordination of regime choice may be necessary to ensure optimal outcomes.

Fiscal Policies and the Choice of Exchange Rate Regime

A common argument against either a monetary union or a regime or a fixed exchange rates is that they preclude flexible use of the inflation tax. The authors address this point of view by comparing three alternative exchange rate regimes: a pure float, an EMS-regime in which the exchange rate is fixed but can be realigned, and a monetary union. The authors model the three regimes as alternative commitments on future seigniorage policies. This approac h suggests that it is not possible to Pareto-rank the three regimes. O n the other hand, the authors provide intuitive conditions under which each of the systems is superior to the others. Copyright 1993 by Royal Economic Society.

Exchange Rate Policies for Developing Countries

The I98os saw major changes in exchange rate regimes in many developing countries, the significance of which can now be assessed. In addition, there have been, since I978, some fascinating experiments in the use of exchange rate policy for inflation stabilisation. These experiences raise important issues. This paper draws on a World Bank-supported project which examined in depth the macroeconomic experience of eighteen developing countries since I965 and especially during the period I 980-go. Table I lists the countries and gives some relevant information about them.' All examples come from these countries, and generalisations are based on their experiences. The focus here is on the contrast or competition between the real targets approach to exchange rate policy and the nominal anchor approach.2 The real targets approach might be described as 'orthodox', but the nominal anchor approach has been frequently advocated, especially by Europeans. The issues are somewhat similar to those debated in Europe in connection with membership of the Exchange Rate Mechanism of the EMS and the proposed moves towards monetary union. But, as noted in Section VI below, in ,developing countries the balance of considerations is probably different, and experiences certainly are. First, I shall deal with the choice of exchange rate regime for countries starting with low or moderate inflation. The role of exchange rate policy in the stabilisation programmes of high-inflation countries will be discussed in Section V.

Exchange Rate Regime Choice

Traditionally the choice of exchange rate regime has been seen as a second-best policy choice, which can be directed toward mitigating the distortionary effects of price or information rigidities. In this paradigm the optimal degree of exchange rate flexibility is found to depend of the source and nature of shocks hitting an economy. More recent literature views the exchange rate as a widely and frequently seen manifestation of government policy with careful exchange-rate management emerging as a tool that can enhance shaky policy credibility.

Exchange Rate Regime Choice

Traditionally the choice of exchange rate regime has been seen as a second-best policy choice, which can be directed toward mitigating the distortionary effects of price or information rigidities. In this paradigm the optimal degree of exchange rate flexibility is found to depend of the source and nature of shocks hitting an economy. More recent literature views the exchange rate as a widely and frequently seen manifestation of government policy with careful exchange-rate management emerging as a tool that can enhance shaky policy credibility.

Real exchange rate variability and the choice of exchange rate regime by developing countries

This paper draws together two distinct strands of the exchange rate literature. It proposes that real exchange rate variability and the choice of exchange rate regime are jointly determined. I test this claim by estimating a simultaneous limited-dependent variable model, with data from a cross section of developing countries during the recent floating period. Drawing on the relevant exchange rate literature, the paper examines a number of exogenous determinants of exchange rate variability and the choice of exchange rate regime.