Choice Of Exchange Rate Regime Research Articles

Setting the Stage for a National Currency in the West Bank and Gaza: The Choice of Exchange Rate Regime

This paper sheds light on the quantitative behavioral responses of key economic variables in the Palestinian economy in the face of major economic shocks and draws implications for the choice of an exchange rate regime should a decision be taken to introduce a national currency. Time-series regression analysis shows that (i) wages and prices are flexible in the face of various shocks; (ii) the real wage appears rigid in the face of various shocks and increases despite higher unemployment; (iii) an appreciation of the new Israeli Sheqalim real effective exchange rate decreases exports and imports; and (iv) money demand appears stable in the face of exchange rate shocks. Although a fixed exchange rate system may initially be desirable to establish credibility of the new currency, some flexibility of the exchange rate is desirable over time.

Setting the Stage for a National Currency in the West Bank and Gaza: The Choice of Exchange Rate Regime

"Volume 2005 (2005): Issue 070 (Apr 2005): Setting the Stage for a National Currency in the West Bank and Gaza: The Choice of Exchange Rate Regime" published on 01 Apr 2005 by International Monetary Fund.

Exchange rate system and policy in the present world

The choice of exchange rate regime is important, not only in terms of its effect on trade flows, but also with respect to inflation expectations. Countries facing disinflation may find that pegs regimes are more appropriate solution. But where the trade balance account is significantly deteriorated and growth has been sluggish, a more flexible regime might be called for. The natural classification in eighties and early nineties suggests that intermediate regimes may provide important advantages ? to capture some of the benefits of both extremes while avoiding many of the costs. However today many experts predicted that exchange rate regimes would move in a "bipolar" manner to the extremes of "hard" pegs or free floats. An increasing number of countries did announce their intent to allow greater exchange rate flexibility. But, in practice, countries had a "fear of floating ". Distinction is made among advanced, emerging and other developing countries. Emerging markets have stronger links to international capital markets than do other developing economies. Thus, while non-emerging market developing economies may gain credibility through pegging their exchange rates, emerging markets find it harder to do so and could benefit from investing in "learning to float". More advanced economies with their access to international capital market are best positioned to enjoy the benefits of flexibility. 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. But, there is no final conclusion on the idea that intermediate regimes will dissapear.

Cataclysms and Currencies: Does the Exchange Rate Regime Matter for Real Shocks?

Does the choice of exchange rate regime affect the way an economy's adjustment to real shocks? Exploiting the randomness of natural shocks, this paper assesses empirically the often contrasting answers found in the theoretical literature. The evidence supports key themes in this literature, and points to an important tradeoff between regimes. First, adverse natural shocks are associated with both higher investment and foreign direct investment (FDI) only in developing countries with fixed rate regimes. Second, over a 24-month horizon, growth rebounds earlier in flexible rate regimes. Third, in the long run, more adverse shocks are associated with higher growth and investment only in predominantly fixed regimes. Thus, while claims of faster adjustment to real shocks under flexible rate arrangements have merit, so does the idea that exchange rate variability can impede investment. And the benefits from faster adjustment may come at the cost of foregoing the long run productivity benefits embodied in the larger investment response in fixed rate regimes.

Real exchange rate volatility and the choice of regimes in emerging markets

Traditional models of the choice of exchange rate regimes ignore the destabilizing effects of sharp and unanticipated exchange rate movements. Recent research, however, has shown that these movements have real costs in emerging markets owing to the dollarization of liabilities. This paper evaluates the performance of an emerging market economy under a credibly fixed rate, a collapsing fixed rate, and a flexible-rate regime using a speculative attack model that takes into account the real effects of unanticipated movements in exchange rates. The model is applied to South Korea to determine the dominant exchange rate regime.

Choice of an Exchange Rate Regime: the Role of Optimum Currency Area Theory

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.

The Choice of Exchange-Rate Regime and Speculative Attacks

We develop a framework for studying the choice of exchange rate regime in an open economy where the local currency is vulnerable to speculative attacks. The optimal regime is determined by a policymaker who trades off the loss from nominal exchange rate uncertainty, against the cost of maintaining a given regime. This cost is affected in turn by the likelihood of a speculative attack. Searching for the optimal regime within the class of exchange rate bands, we show that the optimal regime is either a peg (a zero-width band), a free float (an infinite-width band), or a non degenerate finite width band. The paper shows that lower costs of moving across currencies induce policymakers to set more flexible exchange rate systems. This lowers, ceteris paribus, the likelihood of financial crises. One implication is that a Tobin tax does not necessarily reduce the likelihood of currency crises. The paper also investigates the effects of country size, openess, variability in fundamentals and reputation on the choice of exchange rate regime. The role of abrupt changes in reputation in triggerering crises (even with unchanged fundamentals) as an alternative to ”sunspots” is discussed and illustrated.

The determination of capital controls: Which role do exchange rate regimes play?

This paper investigates the role of exchange rate regime choices in the determination of capital controls in transition economies. We first use a simultaneous equations model to allow direct interactions between decisions on capital controls and on exchange rate regimes. We find that exchange rate regime choices strongly influence the imposition or removal of capital controls, but the feed-back effect is weak. We further estimate a single equation model for capital controls with exchange rate regime choices as independent variables, and we find that there is a hump-shaped relationship between exchange rate regime flexibility and capital control intensity.

Global transmission of interest rates: monetary independence and currency regime

Using a large sample of developing and industrialized economies during 1970–1999, this paper explores whether the choice of exchange rate regime affects the sensitivity of local interest rates to international interest rates. In most cases, we cannot reject full transmission of international interest rates in the long run, even for countries with floating regimes. Only a couple of large industrial countries can choose their own interest rates in the long run. However, short-run effects differ across regimes. Dynamic estimates show that interest rates of countries with more flexible regimes adjust more slowly to changes in international rates, implying some capacity for monetary independence.

Exchange Rate Policy and Inflation in Acceding Countries: The Role of Pass-through

This paper analyzes the link between the choice of exchange rate regime and inflationary performance in four acceding countries to the EU: the Czech Republic, Hungary, Poland and Slovenia. The results allow a clear ranking of countries according to the size of the pass-through effect and the importance of exchange rate shocks to overall inflationary performance. In particular, perfect pass-through effect can be associated with accommodative exchange rate policy, which can moreover become the most important source of inflationary pressures. The analysis suggests that for CEEC-4 an early adoption of the Euro can provide the most efficient framework for reducing inflation.

The stabilization properties of fixed and floating exchange rate regimes

AbstractThis paper investigates the price and output stabilization properties of fixed and floating exchange rates using a small open economy model. The performance of the two regimes is compared in the face of money demand, aggregate demand and aggregate supply shocks. It is shown that the ranking of the two regimes is extremely sensitive to the weighting of the objective function as between price and output stability, the type of shock impinging upon the economy, the values of structural parameters of the economy and institutional features such as the degree of wage indexation within the economy. The results obtained suggest that estimates of the income elasticity of money demand, the elasticity of aggregate demand to changes in both the real exchange rate and the real interest rate, and the degree of openness of the economy are likely to be important to policymakers when making the choice of exchange rate regime. Neither regime can be said to be dominant in all circumstances. Copyright © 2004 John Wiley & Sons, Ltd.

Exchange market pressure on the pound–dollar exchange rate: 1925–1931

This is a study of exchange market pressure against the pound sterling during the inter-war period. The main findings are that (a) the behavior of U.K. fundamentals relative to those of the U.S.A. helps to explain exchange market pressure against the pound; (b) during the run-up to devaluation in September 1931 the monetary authorities in the U.K. were acting to reduce domestic credit; but (c) additional pressure was brought against the pound from speculative sources. These findings relate to current thinking on the choice of exchange rate regime as even well-behaved fundamentals may not be sufficient to sustain a currency on its peg.

Distributional effects of dollarisation: the Latin American case

Over the past two years Ecuador, El Salvador and Guatemala have adopted the US dollar as a legal currency in their countries. Several other Latin American countries, including Argentina, are currently discussing dollarisation. In this policy paper we look at the existing evidence for answers to two basic questions. First, under what general circumstances might dollarisation make sense? Second, are there clearly differentiated winners and losers from dollarisation and, if so, can we identify them, so that policy can take these political economy factors into consideration? Our review of the evidence demonstrates that there are consistent patterns of distributional effects, both positive and negative, from the choice of exchange rate regime. These effects are presently not considered in exchange rate policy decision making, but should be. While the effects are not as pronounced as those from major trade liberalisation agreements, they are significant. Ways to cushion the effects of exchange rate regime choice should be considered in the future by policy makers. Moreover, we find that dollarisation is embedded in the politics of the region. Dollarisation is often sold as a substitute for the deeper institutional reforms needed to improve economic performance and distribution in Latin America.

Dollarization: Debates and Policy Alternatives

The choice of exchange rate regimes has been a subject of debate for a long time. Across the globe countries have experimented with fixed, floating, and a wide variety of pegged exchange rate regimes. The vast empirical evidence on this matter appears to show that there is no single recipe to suit everyone. Hence it is no surprise that the rise of dollarisation has generated so much controversy. The book Dollarization: Debates and Policy Alternatives edited by Eduardo Levy Yeyati and Federico Sturzennegger, is a welcome attempt to organise our understanding of the topic. It consists of a collection of papers that blends analytical, empirical and institutional analyses in tackling this important policy issue. Levy Yeyati and Sturzennegger divide the book into eight Chapters, starting with a useful roadmap in Chapter 1. Chapter 2, by Roberto Chang and Andrés Velasco, provides an analytical framework to elucidate the basic mechanics of dollarisation. Pablo Andrés Neumeyer and Juan Pablo Nicolini engage one of the most debated issues in the context of dollarisation, i.e. the link between sovereign default and devaluation risk, in Chapter 3. Christian Broda and Eduardo Levy Yeyati examine a similarly critical topic, the implications of dollarisation for the central bank’s lender of last resort function, in Chapter 4.

Intégration financière et régimes de change dans les pays candidats

European Financial Integration and Exchange Rate Regimes in CEECs by Mathilde Maurel The Central and Eastern European countries (CEECs ) entering the EU in May 2004 are expected to have a monetary policy compatible with the ERM-II system to eventually enter EMU (European Monetary Union ). Abandoning an independent monetary policy could entail significant costs for countries in the process of catching up . However , these costs have probably been overestimated , biased by the traditional optimal currency area criteria . Firstly , these costs actually change depending on whether they are evaluated ex ante and ex post accession . Between times , financial integration is likely to increase significantly , which changes the evaluation parameters . Accession to the EU and greater capital mobility means that there is little room left for an independent monetary policy , especially in relatively small countries more vulnerable to speculative attacks . Secondly , while the link between choice of exchange rate regime and the underlying fundamentals is somewhat tenuous , the political determinants prove to be decisive . Keywords : exchange rate arrangements , accession to EMU , EU enlargement , international capital flows

L’influence du régime de change sur l’inflation dans les pays adhérents

Exchange Rate Pass-Through in Accession Countries by Fabrizio Coricelli , Boštjan Jazbec and Igor Masten This paper analyzes the link between the choice of exchange rate regime and inflationary performance in four EU accession countries : the Czech Republic , Hungary , Poland and Slovenia (CEEC-4 ). The findings generate a clear ranking of the countries by magnitude of pass-through effect and the importance of exchange rate shocks to overall inflationary performance . We find , in particular , that a perfect pass-through effect associated with an accommodative exchange rate policy can become an important source of inflationary pressure . The analysis suggests that early adoption of the euro could be the most effective way for the CEEC-4 to reduce inflation . Keywords : Accession to EMU , pass-through effect , I (2 ) cointegration analysis , policy trade-off

Structural Factors Affecting Exchange Rate Volatility: A Cross-Section Study

The paper examines factors affecting exchange rate volatility, with an emphasis on structural features of the foreign exchange regime. It draws for the first time on detailed survey data collected by the IMF on foreign exchange market organization and regulations. Key findings are that decentralized dealer markets, regulations on the use of domestic currency by nonresidents, acceptance of Article VIII obligations, and limits on banks' foreign exchange positions are associated with lower exchange rate volatility. The paper also provides support for earlier results on the influence of macroeconomic conditions and the choice of exchange rate regime on volatility.

Balance Sheets, Exchange Rate Policy, and Welfare

The debate about the appropriate choice of exchange rate regime is fundamental in international economics. This paper develops a small open-economy model with balance sheet effects and compares the performance of fixed and flexible exchange rate regimes. The model is solved up to a second-order approximation which allows us to address the issue of risk and welfare rigorously. The paper identifies threshold levels of the debt-to-GDP ratio above which fixed exchange rate regimes are welfare superior to monetary policy rules that imply flexible exchange rate regimes. The results suggest that emerging market economies that suffer from a relatively high level of indebtedness and are constrained in their pursuit of optimal monetary policy, could find it beneficial to opt for a fixed exchange rate regime.

Structural Factors Affecting Exchange Rate Volatility: A Cross-Section Study

The paper examines factors affecting exchange rate volatility, with an emphasis on structural features of the foreign exchange regime. It draws for the first time on detailed survey data collected by the IMF on foreign exchange market organization and regulations. Key findings are that decentralized dealer markets, regulations on the use of domestic currency by nonresidents, acceptance of Article VIII obligations, and limits on banks` foreign exchange positions are associated with lower exchange rate volatility. The paper also provides support for earlier results on the influence of macroeconomic conditions and the choice of exchange rate regime on volatility.

Official Dollarisation/Euroisation: Motives, Features and Policy Implications of Current Cases

Official and unilateral dollarisation/euroisation has become a common policy advice for emerging market economies. Against this background, the paper provides a comprehensive review of all the main cases of dollarisation/euroisation, analysing motives, features and policy implications of this exchange rate regime. The main results are that policies fostering integration with the anchor country, in particular fiscal transfers, tourism and offshore finance, have been crucial in supporting the exchange rate regime. To this end, most dollarised/euroised countries have exploited advantages that are largely prior to the choice of exchange rate regime, namely their small size, geographic proximity to the anchor country, and politically dependent status. Thus, recommending dollarisation/euroisation irrespective of countries’ ex ante degree of integration with the potential anchor country seems to bear considerable risks, as dollarisation/euroisation does not seem to be a straightforward substitute for integration.