Choice Of Exchange Rate Regime Research Articles

Choice of exchange rate regime in transition economies: An empirical analysis

In this paper we identify the main determinants of the exchange rate regimes in transition economies (TEs). We use an ordered logit model for the official (de jure) and the actual (de facto) exchange rate classifications and find that the de facto regimes describe better the exchange rate strategies implemented in TEs. In addition, economic size and geographical concentration of trade are important determinants of exchange rate regimes. Furthermore, consistent with the sustainability hypothesis, countries experiencing increasing inflation and having higher budget deficits favor flexible regimes. Moreover, having a more developed financial sector increases the likelihood of choosing floating exchange rates. Finally, we find that countries with stronger governments and higher political stability favor pegs. Journal of Comparative Economics 34 (3) (2006) 484–498.

Managed floating as a strategy to achieve selected monetary policy objectives

The paper considers the connection between exchange rate regimes and economic performance as measured by inflation, output growth, and their volatility. It is argued first that the choice of an intermediate exchange rate regime is complicated by potential conflicts with the requirements of central bank transparency and accountability. These are considered to be longer run questions. Next, three types of managed floating regimes are defined. A variety of counterfactual experiments are shown to illustrate that a managed float, such that the objective of monetary policy is expressed in terms of an inflation target, will produce the most desirable macroeconomic outcome. The counterfactuals are supplemented with estimates of forward-looking Taylor rules to ascertain whether such rules are informative under a managed floating scenario. In general, the answer is that central bank reaction functions become less useful when the exchange rate regime is an intermediate one.

The Reverse Relationship between the Choice of Exchange Rate Regime and the Macro-Variables

The exchange rate regime is an issue which continuously captures academic interests. Since the exchange rate regime affects all macroeconomic variables in every national economy, the choice - whether fixed or flexible, is quite a sensitive and significant decision. Both, fixed and flexible exchange rate regime, have their advantages and disadvantages. The latter are closely related with a certain level at which the monetary and real variables appear under the one or the other regime. Even though a consensus was reached regarding the positive impact of the fixed regime on the monetary discipline (i.e., low inflation), contradictory arguments still exist for its influence on the economic growth.

Optimal Exchange Rate Policy for a Small Oil-Exporting Country: A Dynamic General Equilibrium Perspective

This paper investigates the choice of optimal exchange rate regime for an oil-exporting small open economy, a case relevant to a large number of primary-commodity economies, in which the terms-of-trade are driven by world commodity price cycle. The new Keynesian small open economy model is extended to include three countries, a small commodity-exporting country (Home) and two large foreign countries. The sources of uncertainty are random monetary (demand), productivity (real), and oil-price (supply) shocks. Despite the nonexistence of a traded sector (other than crude-oil exports) in this primary-commodity economy, the welfare analyses show that flexible exchange rate regimes can reduce terms-of-trade and consumption volatility given certain caveats about pricing-schemes. The analyses also suggest that a basket peg is more welfare-improving compared to a unilateral peg. Further, the variance of the currency in which oil-price is denominated came as an important determinant in welfare analyses. These conclusions have important policy implication, particularly for the Gulf Cooperation Council (GCC) countries as they consider alternative monetary arrangements.

Exchange Rate Policy and Endogenous Price Flexibility

Most theoretical analysis of ∞exible vs. flxed exchange rates takes the degree of nominal rigidity to be independent of the exchange rate regime choice itself. But informal policy discussion often suggests that a credible exchange rate peg may increase internal price ∞exibility. This paper explores the relationship between exchange rate policy and price ∞exibility, in a model where price ∞exibility itself is an endogenous choice of proflt-maximizing flrms. A flxed exchange rate can afiect the optimal degree of price ∞exibility by altering the volatility of nominal demand facing price-setting flrms. We flnd that a unilateral peg, such as a Currency Board, adopted by a single country, will increase internal price ∞exibility, perhaps by a large amount. On the other hand, when an exchange rate peg is supported by bilateral participation of all monetary authorities such as in a Monetary Union, price ∞exibility may actually be less than under freely ∞oating exchange rates. Quantitatively, we flnd that the endogenous increase in price ∞exibility following a unilateral peg might be big enough that output volatility is no greater than it would be under a ∞oating exchange rate regime.

The choice between fixed and flexible exchange rates: Which is best for a small open economy?

The optimal exchange rate regime choice for a small open economy is investigated in a stochastic general equilibrium model. Even if the home money supply fluctuates heavily, pegging the exchange rate to a country with a less volatile monetary policy may not be welfare improving if prices are sticky in producer's currency. Owing to a reduction in the risk premium incorporated in prices output and thus work effort may rise so much that the positive welfare effect of an increase in overall consumption is overcompensated. This effect is stronger the closer the substitutability between home and foreign goods and the larger the tradable sector is. The model further implies that the policymaker can almost always reap a welfare gain by choosing an exchange rate peg if prices are set in the consumer's currency.

Libéralisation du compte capital et choix d'un régime de change, quelle portée pour la flexibilité en Tunisie?

L’adoption par la Tunisie des réformes structurelles de son économie dans un contexte d’ouverture graduelle depuis 1986, lui a permis d’instaurer en janvier 1993 la convertibilité de son compte courant. Le desserrement de la contrainte de change et l’achèvement de la convertibilité totale du Dinar restent des objectifs prioritaires comme finalités pour une plus grande intégration de l’économie tunisienne dans l’économie mondiale. La perspective de la convertibilité intégrale du Dinar pose la problématique du choix prospectif de régime de change. On analyse dans cette étude, dans le cadre de la théorie des jeux, le choix de régime de change optimal par référence à la notion de bien-être. Dans un modèle de biens échangeables/ biens non échangeables, le choix d’un régime de change est défini en termes d’interactions stratégiques entre les autorités monétaires et les entreprises domestiques. Les autorités sont supposées choisir un régime optimal suivant un critère de bien-être en minimisant une fonction de perte définie en termes de compétitivité externe et d’inflation. Les résultats des simulations du modèle montrent que la libéralisation du compte capital serait compatible avec un régime de change flexible.

Exchange rate regime choice

The choice of an adequate exchange rate regime proves to be a highly sensitive field within which the economic authorities present and confirm themselves. The advantages and disadvantages of fixed and flexible exchange rate regimes, which have been quite relativized from the conventional point of view, together with simultaneous, but not synchronized effects of structural and external factors, remain permanently questioned throughout a complex process of exchange rate regime decision making. The paper reflects the attempt of critical identification of the key exchange rate performances with emphasis on continuous non-uniformity and (un)certainty of shelf life of a relevant choice.

Sustaining Fixed Rates: The Political Economy of Currency Pegs in Latin America

Government exchange rate regime choice is constrained by both political and economic factors. One political factor is the role of special interests: the larger the tradable sectors exposed to international competition, the less likely is the maintenance of a fixed exchange rate regime. Another political factor is electoral: as an election approaches, the probability of the maintenance of a fixed exchange rate increases. We test these arguments with hazard models to analyze the duration dependence of Latin American exchange rate arrangements from 1960 to 1999. We find substantial empirical evidence for these propositions. Results are robust to the inclusion of a variety of other economic and political variables, to different time and country samples, and to different definitions of regime arrangement. Controlling for economic factors, a one percentage point increase in the size of the manufacturing sector is associated with a reduction of six months in the longevity of a country's currency peg. An impending election increases the conditional likelihood of staying on a peg by about 8 percent, while the aftershock of an election conversely increases the conditional probability of going off a peg by 4 percent.

Choice of Exchange Rate Regime in Central and Eastern European Countries: An Empirical Analysis

This paper identifies the sources of divergences between current exchange rate policies in Central and Eastern European countries (CEECs). We use an ordered logit model for the official (de jure) and the actual (de facto) exchange rate classifications. We find that the differences of the exchange rate strategies among CEECs cannot be explained by these classifications. Financial and trade openness are the major determinants of divergences among exchange rate strategies in CEECs. More financially and trade integrated countries switch to more rigid regimes.

Exchange rate regimes and macroeconomic performance in Argentina, Brazil and Mexico

This paper deals with the ways in which the exchange rate regimes of Argentina, Brazil and Mexico shaped the macroeconomic performance of those countries over the period 1994-2003. The purpose of the analysis is to draw lessons for Latin American and other countries on whether and how the choice of the exchange rate regime can help sustained growth. As it is impossible to isolate the growth effect of the exchange rate regime in a comparative country study, the paper emphasises those macro variables that have been identified in the theoretical and empirical literature as important channels through which the choice of exchange rate regime affects economic performance, namely, investment, trade openness, capital flows and fiscal or institutional rigidities

The choice of exchange rate regime: An empirical analysis for transition economies*

AbstractWe analyze the choice of exchange rate regimes of the 25 transition economies in Europe and the CIS after 1990. The empirical results show that the traditional Optimum Currency Area considerations provide relevant guidance for the regime choices in these countries. Moreover, regime choices are influenced by inflation rates, cumulative inflation differentials, and international reserves sufficiency. That is, macroeconomic stabilization and the ability to commit to exchange rate pegs also play important roles. Large government deficits have ambiguous effects; they increase the likelihood of moving from flexible to intermediate regimes as well as that of moving from fixed to intermediate ones.

Fear of floating and domestic liability dollarization

Previous attempts to analyze the effect of liability dollarization on “fear of floating” have focused exclusively on the role played by foreign liabilities. Liability dollarization of the domestic banking system, however, poses a similar risk as dollar-denominated deposits and credit impose a source of currency risk on domestic banks and firms, respectively. Findings from a large cross-country sample indicate that domestic liability dollarization plays a central role in producing a “fear of floating” among emerging market countries and developing nations. This is an important result because domestic liability dollarization is more reversible than the dollarization of foreign liabilities, providing a reason for optimism that these countries can regain flexibility in the choice of exchange rate regime and overcome their “fear of floating”.

Purchasing Power Parity and the Asian Financial Crisis

Purchasing power parity (PPP) literature is now vast with literally hundreds of papers offering tests for PPP across a large number of countries. However, despite all the elaborate techniques employed, very little explanation is given as to why PPP is so relevant in policy making. This article provides a basic understanding of PPP and shows why it is considered so important when making policy choices. The discussion also briefly examines how this relates to the Asian economies. Primarily, these economies have been subject to intense scrutiny following the 1997 crisis, particularly with regard to their choice of exchange rate regime and possible monetary unification. The findings of the paper suggests that the PPP has had mixed results in predicting current account difficulties and liquidity crises, such as that experienced in Asia. However, the paper also argues that it still can form an integral part of an ‘early warning system’ designed to foresee economic crisis within a country.

The determinants of Latin American exchange rate regimes

The experience of the last thirty years suggests that a wide range of factors affects policymakers’ choice of exchange rate regime. The initial explanation was that changes in the international sphere dominated domestic policies and strongly influenced how governments decided among the trade-offs. More recently, domestic political factors’ influence on the choice of exchange rate regimes have been emphasized, providing detailed and rich insights into the dynamics of the choice. Neither approach has been entirely successful. Both internal and external factors must be taken into account. This article builds on previous empirical work and takes into account domestic and international influences on the choice of exchange rate regimes in Latin America between 1964 and 1996. In addition, we highlight a variety of ‘interactions’, choices of economic policy that are affected by both national and international pressures and that, in turn, influence the choice of exchange rate regime. The empirical model uses multinomial ordered logit analysis to determine the factors in exchange rate determination and to compare the explanatory of the models with and without the interaction variables.

Globalization and financial instability

Purpose – The paper analyses the challenges of globalization for exchange rate and monetary policy.Design/methodology/approach – It first deals with the implications of globalization for the choice of an appropriate exchange rate regime. Then it discusses different strategic aspects of monetary policy in the light of globalization. Finally, it examines the effect of globalization on inflation and the implications of this for the focus on monetary policy.Findings – The main challenge of globalization for exchange rate policy refers to the choice of an appropriate exchange rate regime. Exchange rate policy is constrained by the financial instability tendency effect of globalization insofar as intermediate exchange rate regimes tend to be very unstable. However, globalization may also create the desire to change the focus of monetary policy. Globalization is sometimes argued to reduce inflationary pressures and therefore to “ease” the job of central banks. However, there are caveats with this conclusion or a...

Exchange rate regimes and macroeconomic stability: the case of Sweden

In this paper I investigate the relevance of the exchange rate regime for macroeconomic stability. I simulate hypothetical macroeconomic developments under different hypothetical regimes in Sweden during the period 1974--1994. The main question is how stable output would have been if Sweden had had a floating exchange rate regime. Would it have been better with a floating exchange rate than the actual quasi-fixed regimeq Also the development with an irrevocably fixed exchange rate is investigated. The results show that the choice of exchange rate regime does influence macroeconomic stability. More precisely, output volatility under the actual exchange rate regime is about the same as under the hypothetical floating exchange rate regime, but output is substantially more volatile under the hypothetical fixed exchange rate regimes. Copyright 2005, Oxford University Press.

On the Choice and Consequences of Exchange Rate Regimes

On the Choice and Consequences of Exchange Rate Regimes

Should China Let Her Exchange Rate Float? The Experience of Developing Countries

We empirically investigate the relationship between economic growth and the choice of exchange rate regimes for forty-two developing countries during the period 1974–1994. We consider several model specifications and three classification schemes of exchange rate regime: the IMF de jure classification, the Reinhart and Rogoff natural classification, and the Levy-Yeyati and Sturzenegger de facto classification. Statistical tests appear to favor the endogenous switching regression model, which encompasses specifications used in previous studies. Holding investment, openness and government consumption constant, we conjecture that should China switch from pegged to floating exchange rate regime, her growth rate is likely to fall by one to two percent.

Book Reviews

Review of International EconomicsVolume 13, Issue 2 p. 397-401 Book Reviews First published: 27 April 2005 https://doi.org/10.1111/j.1467-9396.2005.00512.xAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract Books reviewed: Quantifying the Impact of Technical Barriers to Trade: Can It Be Done? edited by Keith Maskus and John Wilson, Ann Arbor: University of Michigan Press, 2001, pp. xvi, 241. Reviewed by Arghya Ghosh Too Sensational: On the Choice of Exchange Rate Regimes, by W. Max Corden, Cambridge, MA: MIT Press, 2002, pp. xiv, 274; index. Reviewed by Sven W. Arndt Volume13, Issue2May 2005Pages 397-401 RelatedInformation