Intermediate Exchange Rate Regimes Research Articles

Economic growth and deviations from the equilibrium exchange rate

This paper investigates the heterogeneous relationship between per capita economic growth rate and the deviations from the equilibrium exchange rate, as different types of countries might exhibit different dynamics, and macro variables cannot easily capture region-specific heterogeneity. Using annual data for 103 countries during the 1996–2016 period and applying the novel grouped fixed effects estimator developed by Bonhomme and Manresa (2015), the empirical analysis presented in this paper indicates that such relationship varies across groups of countries, endogenously identifying six groups with different time patterns and a different estimated impact (ranging from −0.0643 to −0.0014). Overall, our findings imply that deviations from the equilibrium exchange rate reduce the pace of real economic growth, regardless of income category, documenting that the effects are most pronounced for advanced economies, followed by low income developing countries and, finally, for emerging economies Our results also suggest that fixed and intermediate exchange rate regimes severely slow down economic growth.

Exchange Rate Volatility Effect on Economic Growth under Different Exchange Rate Regimes: New Evidence from Emerging Countries Using Panel CS-ARDL Model

This paper analyzes the impact of exchange rate volatility on economic growth under various exchange rate regimes. It empirically examines this issue in 14 emerging countries from 1990 to 2020. This study has three particularities: First, we use the GARCH model to generate the conditional variance, which will be used as a proxy variable for the exchange rate volatility. Second, to address our issue, we employ the Panel CS-ARDL model, one of the most recent models for handling panel cases. Third, we apply the Dumitrescu and Hurlin Granger non-causality test to capture the potential indirect effect that exchange rate volatility can have on economic growth through the channel of its determinants. The results of our study demonstrate that exchange rate volatility costs emerging countries both directly and indirectly in terms of growth. However, by controlling our countries according to the adopted exchange rate regime, we find that the magnitude of this impact tends to be stifled in the case of countries adopting intermediate exchange rate regimes. Through their combination of rigidity and flexibility, intermediate exchange rate regimes appear to be more effective in mitigating the direct effects of exchange rate volatility on economic growth.

THE ROLE ASYMMETRIES IN EXCHANGE RATE REGIMES AND MACROECONOMIC PERFORMANCE: THE CASE OF NIGERIA

The role of exchange rate in the macroeconomic fundamentals of a country cannot be underestimated but the nonlinear (asymmetric) feature of the exchange rate movements becomes of importance when analyzing its role in macroeconomic performance. Thus, this study, using historical annual time series data from 1970 and 2020, and a nonlinear ARDL model investigated the nexus between exchange rate regimes and the macroeconomic performance in Nigeria. This model allows us to capture that the partial sum of positive exchange rate movements (exchange rate depreciations) and negative exchange rate movements (exchange appreciations). We found the potential exchange rate regime to cause declining inflationary pressure sensitive to whether the exchange rate regime is responding to depreciation or appreciation in its movement. But then, irrespective of whether the exchange rate is depreciating or appreciation, the exchange rate regimes exhibit little or no significant impact on output growth in Nigeria. Specifically, we find that an intermediate exchange rate regime based on exchange rate depreciations is viable for promoting trade surpluses, whereas intermediate exchange rate regime that is due to appreciation of exchange rate tends to cause to trade deficit. More importantly, we found that the magnitude of the role of the nonlinear feature of exchange rate on trade balance is relatively higher when the exchange rate is appreciating.

Effects of the business cycle on real exchange rate misalignments with respect to exchange rate regimes

This paper explores the relationship between real exchange rate (RER) misalignments and economic fundamentals with respect to the exchange rate regime choice. In a first step, using the technical inefficiency model, we measure RER misalignments and, more specifically, RER overvaluation. In a second step, we assess the effects of the main economic indicators and the choice of a country's exchange rate regime on RER overvaluation. Our empirical findings, based on nonlinear specifications and impulse response functions of Panel Vector Auto Regression (PVAR) estimations, reveal that for developing countries, and during the expansion and peak phases of the business cycle, the floating exchange rate regime may be used as a policy tool to contain the pressure in the exchange rate, and so limit overvaluation. Our findings also reveal that in the context of fixed and intermediate exchange rate regimes, an expansionary monetary policy is an effective tool to stabilize exchange rate fluctuations and mitigate overvaluation.

Monetary Policy Spillovers under Intermediate Exchange Rate Regimes

Testing the international Trilemma traditionally relies on discretely classified exchange rate regimes. This simplification limits the implications drawn for middle-ground policies like managed floats or basket pegs, and inhibits inference on the empirical shape of the exchange rate stability -- monetary autonomy trade-off. To address these issues, this paper proposes a continuous measure of exchange rate flexibility for estimating monetary policy spillovers along the entire spectrum of peg intensities. Monetary spillovers generally increases with exchange rate stability, even within middle ground policies, and basket pegs diversify such spillovers. Using machine learning techniques, I then test for non-linearities, and show that the relationship between monetary autonomy and exchange rate stability is significantly non-linear: partially targeting the exchange rate translates to disproportionately smaller or larger monetary spillovers along middle-ground exchange rate regimes. For emerging markets in particular, active reserves management is a key mechanism associated with relaxing the Trilemma.

Monetary policy spillovers under intermediate exchange rate regimes

Testing the international Trilemma traditionally relies on discretely classified exchange rate regimes. This simplification limits the implications drawn for middle-ground policies like managed floats or basket pegs, and inhibits inference on the empirical shape of the exchange rate stability – monetary autonomy trade-off. To address these issues, this paper proposes a continuous measure of exchange rate flexibility for estimating monetary policy spillovers along the entire spectrum of peg intensities. Monetary spillovers generally increase with exchange rate stability, even within middle ground policies, and basket pegs diversify such spillovers. I then estimate the empirical shape of the trade-off using machine learning techniques, finding that the relationship between monetary autonomy and exchange rate stability is significantly non-linear in both advanced economies and emerging markets. Specifically, partially targeting the exchange rate translates to disproportionately smaller or larger monetary spillovers along middle-ground exchange rate regimes. For emerging markets in particular, active reserves management is a key mechanism associated with these non-linearities.

The external wealth of Arab nations: Structure, trends, and policy implications

AbstractThe paper makes two contributions. First, it analyzes net foreign assets (NFA) and liabilities in selected Arab countries. Second, the paper examines the effects of policy variables that affect the accumulation of NFA and its components, analyzing how the existence of a sovereign wealth fund (SWF), the country's exchange rate regime, and the development of its financial system affect its NFA. The main findings show that the presence of a SWF is positively and significantly associated with foreign direct investment in Arab countries. While financial development matters, intermediate exchange rate regimes are associated to more uncertainty compared to fixed or flexible ones. Our results remain robust even we control for the endogeneity between SWF and NFA components.

The cost of banking crises: Does the policy framework matter?

This paper empirically investigates how the stringency of monetary, fiscal and exchange rate policy frameworks impacts the expected cost of banking crises. A restrictive policy framework may promote stronger banking stability, by enhancing discipline and credibility, and by giving financial room to policymakers. At the same time though, tying the hands of policymakers may be counterproductive and procyclical, especially if it prevents them from responding properly to financial imbalances and crises. Our analysis considers a sample of 146 countries over the period 1970–2013, and reveals that extremely restrictive or lax policy frameworks are likely to increase the expected cost of banking crises. By contrast, by combining discipline and flexibility, some policy arrangements such as budget balance rules with an easing clause, intermediate exchange rate regimes or an inflation targeting framework may significantly contain the expected cost of banking crises. As such, we provide evidence on the benefits of “constrained discretion” for the real impact of banking crises.

CRESCIMENTO ECONÔMICO E REGIMES CAMBIAIS: ANÁLISE DE PAINEL

O objetivo deste trabalho é investigar a importância dos regimescambiais para o crescimento econômico utilizando uma amostra de 82 países, noperíodo de 1970 a 2009, e também avaliar o papel dos diversos tipos de crisesfinanceiras. Os resultados das estimações System GMM indicam que países comregimes de câmbio flexível e intermediários tiveram maiores taxas de crescimentoem comparação com os que adotaram regimes de câmbio rígido/fixo no períodototal (1970 a 2009), porém, tal resultado não é robusto para o período de 1990 a2009. Tal resultado deve estar associado ao fato de que regimes de câmbio flexívele intermediário são menos propensos a estar associados a significativas apreciaçõescambiais que têm impacto negativo sobre o setor exportador. Para o períodopós-1970, o crescimento econômico depende de variáveis como taxa de inflação,anos de educação (proxy para capital humano), termos de troca e taxa de investimento.Já no período pós-1990, a variável gastos do governo como percentualdo PIB (proxy para disciplina fiscal) tem significância estatística e sinal negativo, indicandoque uma maior (menor) disciplina fiscal está associada a maiores (menores)taxas de crescimento econômico. Quanto às diversas crises, estas não tiveramsignificância estatística para o crescimento, com exceção das crises de reversãobrusca nos fluxos de capitais no período pós-1990.

Effect of the Real Exchange Rate on the Sustainability of Current Account Deficits in Sub-Saharan African Countries

Sub-Saharan African countries run many current account deficits in the context of the new world economic order, namely globalization. The theoretical literature reveals that the real exchange rate improves the sustainability of the current account deficit, the effect of which may differ according to the type of exchange rate regime. Empirically, the authors are not unanimous on this issue. This paper analyses the effect of the real exchange rate on the sustainability of current account deficits in Sub-Saharan African countries over the period 1980-2016. Using a logit model applied to a panel of 38 countries and estimated using the maximum likelihood method, it appears that the depreciation of the real exchange rate has a positive effect on the sustainability of the current account deficit. This effect depends on the type of exchange regime. Under a floating exchange rate regime, the real exchange rate acts positively on the sustainability of the current account deficit when this rate is less than or equal to 250. On the other hand, under an intermediate exchange rate regime, the real exchange rate increases the sustainability of the current account deficit when the rate is between 275 and 600. In the case of the fixed exchange rate regime, the real exchange rate has a positive effect on the sustainability of the current account deficit if the rate is greater than or equal to 700. In the light of these results, the paper suggests to policymakers, the use of the real exchange rate to improve the sustainability of current account deficits. These policymakers should use real exchange rates below 250 for countries adopting a floating exchange rate regime, between 275 and 600 for the intermediate exchange rate regime, and greater than 700 for the fixed exchange rate regime.

State dependence and exchange rate regime choice: a new empirical explanation to the polarization phenomenon

This paper, using the dynamic multinomial choice random effect panel Logit model, and focusing on the intermediate exchange rate regimes, tries to provide new empirical explanations to the special polarization phenomenon. The main findings are as follows: Firstly, the state dependence can influence the choice of exchange rate regimes greatly, and the state dependence can explain the phenomenon of the special polarization. Secondly, the non-state dependence factors influence exchange rate regimes choice of different development stage economies in different manner. The non-state dependence factors can also explain the special polarization. Thirdly, the policy makers will choose the less-flexible exchange rate regimes with the increasing of capital account openness. The intermediate exchange rate regimes can survive and stabilize the economy under certain conditions. Lastly, this paper draws a series of important conclusions and policy implications.

Impact of Economic Policy Uncertainty on Exchange Market Pressure

Capturing changes in foreign reserves and exchange rates through the exchange market pressure, this article investigates whether economic policy uncertainty plays any role in exchange market pressure movements while controlling for the effects of domestic and external factors. A panel of 20 countries was examined from 2003Q1 to 2017Q4 using panel techniques that are consistent in the presence of heterogeneity and cross-sectional dependence. The study finds that a long-run relationship exists between exchange market pressure and economic policy uncertainty. Our estimation results reveal that a rise in economic policy uncertainty, consumer price index, trade openness, and financial openness increases the severity of the exchange market pressure in the long run. However, gross domestic product (GDP) growth, domestic credit, and foreign direct investment inflows can cushion the effect of the pressure. Therefore, irrespective of whether a country operates fixed, flexible, or intermediate exchange rate regime, its foreign exchange market is still significantly affected by economic policy uncertainty.

The Cost of Banking Crises: Does the Policy Framework Matter?

This paper empirically investigates how the stringency of macroeconomic policy frameworks impacts the unconditional cost of banking crises. We consider monetary, fiscal and exchange rate policies. A restrictive policy framework may promote stronger banking stability, by enhancing discipline and credibility, and by giving financial room to policymakers. At the same time though, tying the hands of policymakers may be counterproductive and procyclical, especially if it prevents them from responding properly to financial imbalances and crises. Our analysis considers a sample of 146 countries over the period 1970-2013, and reveals that extremely restrictive policy frameworks are likely to increase the expected cost of banking crises. By contrast, combining discipline and flexibility means that some policy arrangements such as budget balance rules with an easing clause, intermediate exchange rate regimes or an inflation targeting framework may significantly contain the cost of banking crises. As such, we provide evidence on the benefits of constrained discretion for the real impact of banking crises.

Systematic Managed Floating

A majority of countries neither freely float their currencies nor firmly peg. But most of the remainder in practice also don’t obey such well-defined intermediate exchange rate regimes as target zones. This paper proposes to define an intermediate regime, to be called “systematic managed floating,” as an arrangement where the central bank regularly responds to changes in total exchange market pressure by allowing some fraction to be reflected as a change in the exchange rate and the remaining fraction to be absorbed as a change in foreign exchange reserves. An operational criterion for judging systematic managed floaters is a high correlation between exchange rate changes and reserve changes. The paper rejects the view that exchange rate regimes make no difference. In regressions to test effects on real exchange rates, we find that positive external shocks tend to cause real appreciation for most systematic managed-floaters; more strongly so for pure floaters; and not at all for most firm peggers. Two measures of exogenous external shocks are used: (i) for commodity-exporters, a country-specific index of global prices of the export commodities and (ii) for other Asian emerging market economies, the VIX.

International trade, exchange rate regimes, and financial crises

The main objective of this paper is to study the impact of different exchange rate regimes on international trade and to analyze their performance during crises. To this end, a gravity equation for bilateral trade is estimated for a sample of 191 countries over the period 1970–2016 by adding a set of regressors built from a de factoclassification of exchange rate arrangements and the dates of recognized financial crises. Moreover, we differentiate between anchor currencies and direct and indirect exchange rate arrangements. The gravity model is consistently estimated by including three different types of high-dimensional fixed effects and using PPML estimates. The main empirical findings are: (i) other intermediate exchange rate regimes, between completely fixed and completely flexible, promote flows of goods between countries; (ii) results depend on the anchor currency and indirect arrangements do not have any significant impact on international trade; (iii) systemic banking crises negatively affect trade flows between countries; and (iv) the impact of the exchange rate regimes on trade during crisis depends on the anchor currency and whether the crisis takes place in the exporting or the importing country.

Terms of Trade Externality, Sterilized Interventions and Optimal Chinese Monetary Policy

We incorporate terms-of-trade externality into a small open economy featuring an incomplete market, sterilized intervention, and capital controls as in Chang et al. (2015), and we highlight the central banks reaction to exchange rate movement. Our calibrated model using data from China shows that an optimal monetary policy is crucially dependent on the Armington elasticity between domestic and foreign goods. For a wide range of Armington elasticity values, an intermediate exchange rate regime dominates the bipolar (fixed or floating) exchange regimes in terms of welfare gains.

An empirical assessment of exchange arrangements and inflation performance

Abstract. This article provides empirical support for the hypothesis that different exchange rate regimes have an impact on inflation in advanced, emerging and developing countries. The effects of different exchange rate regimes on inflation performance are examined through least squares dummy variables regressions using panel data on 125 countries for the post-Bretton Woods (1974-1999) period. Also, this article addresses the issue of measurement errors in the classification of exchange rate regimes by using four different classification schemes. Three de facto and one de jure classifications are used. Consequently, the sensitivity of these results to alternative exchange rate classifications is also tested. The empirical findings indicate that countries with fixed regimes tend to have a lower inflation rate compared to floating and intermediate exchange rate regimes, particularly in emerging and developing countries. Keywords. Exchange rate regimes, Inflation. JEL. E31, F31, F33.

Cost of Banking Crises: Does the Policy Framework Matter?

This paper empirically investigates how the stringency of macroeconomic policy frameworks impacts the unconditional cost of banking crises. We consider monetary, fiscal and exchange rate policies. A restrictive policy framework may promote stronger banking stability, by enhancing discipline and credibility, and by giving financial room to policymakers. At the same time though, tying the hands of policymakers may be counterproductive and procyclical, especially if it prevents them from responding properly to financial imbalances and crises. Our analysis considers a sample of 146 countries over the period 1970-2013, and reveals that extremely restrictive policy frameworks are likely to increase the expected cost of banking crises. By contrast, by combining discipline and flexibility, some policy arrangements such as budget balance rules with an easing clause, intermediate exchange rate regimes or an inflation targeting framework may significantly contain the cost of banking crises. As such, we provide evidence on the benefits of “constrained discretion” for the real impact of banking crises.

Choosing the Exchange Rate Regime-a Case for Intermediate Regimes for Emerging and Developing Economies

The main objective of the paper is to verify the vanishing interim regime hypothesis (so-called bipolar view) and to analyse factors that may influence the probability of use of intermediate exchange rate regimes, especially in emerging and developing economies. In order to accomplish the research objectives the evolution of exchange rate regimes is presented with the special consideration of decisions of IMF member states in this respect. Next a logistic regression model that estimates the probability of use of an intermediate regime is applied. The results achieved allow a challenge to the vanishing interim regime hypothesis. Empirical observations support this hypothesis only in advanced countries and not in their emerging and developing peers.

The effects of real exchange rate volatility on sectoral export flows under intermediate and flexible exchange rate regimes: Empirical evidence from Turkey

The aim of this paper is to analyse empirically the effects of real exchange rate volatility on sectoral exports in Turkey under intermediate and flexible exchange rate regimes. The cointegration test and error correction models are used to test the long-run relationship and short-run effects, respectively. The estimation results show that the real exchange rate volatility has negative and significant effects on sectoral exports in both intermediate and flexible exchange rate regimes. These empirical results are consistent with the theory. However, the impact of real exchange rate and foreign income appeared to be quite different for the two exchange rate regimes. Further, research is required to analyse the impacts of real exchange rate and foreign income on sectoral exports. Keywords: Real exchange rate volatility, real exchange rate, intermediate exchange rate regime, flexible exchange rate regime, sectoral export.