Optimal Exchange Rate Regime Research Articles

Flexibility Versus Fixity of Exchange Rate Regimes in Developing Countries: An Empirical Assessment of Macroeconomic Effects

The process of financial integration initiated by developed countries has been accompanied by a flexible exchange rate regime which is based on market supply and demand. A regime considered as being more acceptable for developed countries in a liberal context. However, developing countries, with their own economic structures, often find it difficult to choose an optimal exchange rate regime for their economies. Although many countries are floating their exchange rate regimes, touting its superiority over other exchange rate regimes, fixed exchange rates are still a resilient regime that can economically compete with flexibility. In this context, this study being presented has taken the liberty to econometrically study through panel data, the evaluation of the macroeconomic effects of exchange rate regimes on a set of emerging and developing countries through the periods of 2000-2016.

ADAPTATION TO EXTERNAL SHOCKS WITHIN THE CURRENCY BOARD SYSTEM ON THE EXAMPLE OF THE BALTIC COUNTRIES AND BOSNIA AND HERZEGOVINA

One of the most important economic policy issues, especially in the post-transition countries, is exchange rate regime (ERR), i.e. the question of optimal exchange rate regime that would stimulate economic growth and propagate macroeconomic stability. For small and EU-oriented countries like Bosnia and Herzegovina (B&H), the EU accession processes and character of countries' economic cycle phase are usually highlighted among many factors. The choice of the appropriate exchange rate system is determinated by the specific characteristics of individual countries, time moment and the characteristics of the external shock occurrence. It is generally accepted that monetary instabilities are treated by fixation and real economic shocks by exchange rate fluctuations. An important criterion for assessing the adequacy of the current exchange rate regime is its response to external shocks, such as the Great Recession in 2008. While flexible exchange rate regime is used as an automatic stabilizer, fixed exchange rates place certain restrictions. The process of macroeconomic adjustment in the Baltic States is an example of how large macroeconomic imbalances can be reduced without adjusting the nominal exchange rate and how the currency board can be successfully used as a stage in the euro introduction process. The aim of this paper is to give a comparative overview of the currency board introduction in Bosnia and Herzegovina and the Baltic countries, results achieved and reactions to external shocks (Great Recession in 2008) within this exchange rate arrangement, so conclusions that could be valuable in post-COVID 19 recovery can be drawn. Key words: exchange rates, currency board, external shocks

Capital Account Liberalization in Morocco: Is it Compatible with Fixed or Flexible Exchange Rate Regime?

Abstract This paper examines the opportunity of exchange rate regime flexibilization in Morocco under the policy of capital account liberalization. Basing on our findings in Ezzahid and Maouhoub (2014), we develop a new theoretical game model with four economic agents, namely: monetary authorities, government, foreign firms and domestic firms. We explore the optimal exchange rate regime for Morocco under new conditions such as the presence of a compensation fund effect, restrictions on capital outflows, etc. Starting with a first simulation based on current economic parameters, the results show that losses under a flexible exchange rate regime are lower than losses under a fixed exchange rate regime. Varying different parameters allow discovering the ‘appropriate level’ from which monetary authorities should move toward the flexible exchange rate.

ASEAN income gap and the optimal exchange Rate Regime

ABSTRACTThis article investigates the optimal exchange rate regime in a group of ASEAN countries, which minimizes the adverse effects of foreign demand shocks on real output, the real exchange rate, price level and between-country income gap. Using a panel structural vector autoregressive model for small open economies, we show that the extent by which foreign demand shocks influences the between-country income gap depends on the exchange rate regime and the transmission channels through output, the price level and the real exchange rate. Our results show that a fixed exchange rate is better in insulating output and real exchange rates against adverse foreign demand shocks. Nevertheless, a flexible exchange rate regime achieves lower inflation and narrows the income gap across countries. Further, foreign demand shocks explain a larger portion of the forecast error variance of macroeconomic variables under a fixed than under a flexible exchange rate regime.

The Determinants of Optimal Exchange Rate Regimes in High and Low Oil-Producing Countries

This research studies the theoretical determinants of the exchange rate regime choice in oil-producing countries and investigates whether these choice determinants differ if oil-producing countries classified as high (HOP) and low (LOP) oil-producing countries. To gain insight into these issues, governance indicators are introduced in addition to the main theoretical determinants to determine whether these variables play significant roles in regime decisions. An ordinal probit model was utilized to examine panel data from 38 oil-producing countries from 1996 to 2015. The results support the research hypothesis that the determinants of the choice of exchange rate regime differ between HOP and LOP countries. This difference was evident when governance indicators were included in the model in the de jure classifications for HOP and LOP countries. The main policy implication is that enhanced governance indicators provide support for a fixed exchange rate regime in oil-producing countries.

Governance and economic growth: The role of the exchange rate regime

In this paper, we revisit the relationship between governance and economic growth focusing on the role of exchange rate regime. The conventional theoretical view is that increased quality of governance stimulates economic growth, while recent years show that some countries with weak governance are experiencing more economic growth. We show that the effect of governance on economic growth is influenced by several factors such as the potential costs associated with choice of the exchange rate regime. We carried out GMM regressions on panel data to overcome heteroscedasticity, autocorrelation and homogeneity problems. Our panel covers the period 1996-2012 and comprises 50 countries, among which 21 are developed and 29 are emerging. We found that governance is not highly significant to explain economic growth while exchange rate flexibility significantly destabilizes emerging markets and accelerates economic growth in developed countries. Likewise, we found that good governance encourages the choice of flexible exchange rate regime and that exchange rate flexibility requires the improvement of governance to stimulate economic growth in emerging countries. Concerning developed countries, good governance accelerates economic growth if the exchange rate regime is not too flexible and exchange rate flexibility increases economic activity if the governance is not of high quality. Thus, our estimates show that the nature of the exchange rate regime plays a crucial role in the decision to improve the quality of governance. Similarly, the quality of governance determines the optimal exchange rate regime. The interaction term between the overall governance index and the degree of exchange flexibility is statistically significant at the conventional threshold, confirming the importance of the theoretical and empirical foundations raised in this research.

Http://www.iosrjournals.org/iosr-jef/papers/Vol8-Issue2/Version-4/D0802042735.pdf

One of the most important and recent issues for the last decade in international finance, is the choice of an optimal Exchange Rate Regime for emerging and developing countries, because it stands as the major factor in the drive for economic stability according to different studies. In this context, encouraged recently by the IMF to introduce a greater flexibility to its Exchange Rate Regime, Morocco as a small economy has already started working on the process to establish the new reform in its Exchange Rate Regime, so as pledged, it can reinforce its integration in the international financial system in order to achieve different targets of the economy. However, the transition from the actual Regime to a more flexible one is not a simple equation; that's why we intended in our paper to answer different questions related to the fundamentals of the economy through a scrupulous analysis that helps have a more clear vision on whether to float or peg the Moroccan Exchange Rate Regime. Our study is based on a quantitative comparative benchmark between Morocco and other emerging countries in order to evaluate the decision made by the Moroccan Central Bank.

為替制度の移行における動学的な最適経路： 中国，シンガポール，マレーシアの分析

We consider the optimal exchange rate regime transition policy for three East Asian countries: the People’s Republic of China (PRC), Malaysia, and Singapore. In contrast to two traditional approaches to exchange rate regimes in East Asia, we conduct a dynamic transition analysis. Based on a small, open-economy dynamic stochastic general equilibrium model applied to these three countries, we define transition policies from a dollar peg regime to either a basket peg or a floating regime and compare the welfare gains of these policies relative to maintaining the current dollar peg regime. The quantitative analysis using PRC, Malaysian, and Singaporean data shows that the PRC would be better off shifting gradually from a dollar peg to a basket peg. In response to the PRC’s shift, both Malaysia and Singapore would opt to shift gradually to a basket peg regime.

Optimal Exchange Rate Regime and Economic Growth: Case of Emerging Country

This study aims to identify the optimal exchange rate regime that ensures the highest growth for emerging country. Based on a sample of 24 emerging country over the period 1974-2008, our results show that during the first 1974-1984 decade, the fixed regime offers the best growth compared to the flexible and intermediate regimes with a 3.5% rate. From 1985 to 2008, the two-polar-regimes offer approximately the same level of growth with a slight preference for the flexible regime. However, the intermediate regime has the highest average growth rate (2.79%). Moreover, our model reveals that the intermediate regime provides the emerging country with the highest growth rates.

Валютный курс, инфляция и промышленная политика

The dynamics of the exchange rate of the Russian ruble is considered in the context of the discussions on the optimal exchange rate regimes. It is shown that the dominant focus on the stability of the nominal exchange rate was erroneous. Since the prices in Russia grew faster than in the countries - its trading partners, this policy led to an overvaluation of the real exchange rate and caused the shock devaluations in 1998, 2008 and 2014-2015. It is argued that the best regime for Russia is the dirty float aimed at maintaining relatively low and stable real exchange rate. This implies the periodic devaluation of the nominal rate. This implies the periodic devaluation of the nominal exchange rate. The suggested policy entails accumulation of foreign exchange reserves that stimulates export oriented growth. These reserves can also become a source of investment in case of appropriate industrial policy.

THREATS AND BENEFITS OF EXCHANGE RATE REGIMES FOR UKRAINE IN TERMS OF EUROPEAN INTEGRATION

The purpose of the paper is to determine threats and benefits of exchange rate regimes in terms of the integration of Ukraine into the European community. Emphasizing features of the manifestation of currency exchange rate in Ukrainian practice is a precondition for choosing the optimal exchange rate regime for Ukraine, which, in its turn, will provide an opportunity to reduce inflation and implement effective tools of monetary and fiscal policies to promote further economic growth and competitiveness of the country. The uses of free-floating exchange rate and «currency board» regimes have either positive effects for Ukraine or certain threats. Methodology. This research is based on a synthesis of data on the uses of exchange rate regimes in Ukraine as an independent. It is considered angular regimes, which are by far the most suitable for Ukraine in terms of the European vector of its development. Peculiarities of using these regimes are revealed and their major threats to the domestic economy are pointed out. This article analyzes the dynamics of the trade balance of payments of Ukraine, the dynamics of the commodity structure of Ukraine`s exports and imports and the external debt of Ukraine. Results. Taking into account the experience of countries, which were in crisis situations, they show the necessity of the uses of freefloating exchange rate regime and possibilities of «currency board» regime, despite threats that they may have. World experience testifies the implementation of structural reforms, effective monetary policy, fiscal policy and discipline of the government. Thorough preparation of Ukraine’s transition to the «currency board» regime can justify itself in conditions of crisis and provide impetus to Ukrainian economy benefits. The paper defines conditions under which the success of a new model of exchange rate policy will be achieved. Practical implications. The study accents attention on the specifics of the uses of the free-floating exchange rate and «currency board» regimes in the current recessionary economic and political conditions, and the declared Strategy on Sustainable Development «Ukraine–2020» in terms of European integration. Moreover, advantages and threats of the most favorable exchange rate regimes were identified to overcome the economic crisis, and accordingly create conditions for further economic growth and increase competitiveness of the country. This article provides an opportunity to identify the conditions for success of a new model of exchange rate policy to achieve economic stabilization and the beginning of economic growth. Value/originality. Despite the existing studies in the field of exchange regulation at present, there are no comprehensive concepts and a common approach to the uses of an exchange rate regime in Ukraine to stabilize the economy, create conditions for long-term economic growth and increase the competitiveness of the economy. It identifies the need to conduct this study, focuses the attention on the conceptual basis of freefloating exchange rate and «currency board» regimes, and deepen scientific and methodological research base of the studying exchange rate regimes particularly those that would help Ukraine to overcome the crisis. This paper reveals the authors’ views on the uses of the new model of exchange rate policy, the success of which depends primarily on the government.

Exchange Rate Dynamics and Monetary Policy in a Small Open Economy: A DSGE Model

This paper compares alternative monetary policy rules in a small open economy that experiences internal shocks (productivity shocks) and external shocks to terms of trade and the foreign demand. A comparison of the volatility of the macroeconomic variables such as inflation, output, terms of trade, trade balance, investment and exchange rates under the different monetary rules is set to lead to the choice of the optimal exchange rate regime. I will show that these regimes can be ranked in terms of their implied volatility for the considered macroeconomic variables. A two-country version of the Calvo sticky price model is used to analyze the macroeconomic implications of four alternative monetary policy regimes for a small open economy: domestic inflation targeting, managed float, CPI targeting and an exchange rate peg. The degree of exchange rate pass-through is very important for the assessment of monetary rules. I find that the CPI targeting rule is the best policy in an economy that exhibits lagged exchange rate pass-through. With low pass-through, both the domestic and the overall prices respond sluggishly to shocks, and it is more efficient for the monetary authority to target the overall CPI rather than just domestic prices. In a low pass-through environment, the policy maker can simultaneously strictly target (CPI) inflation, but still allow high volatility in the nominal exchange rate to stabilize the real economy in face of shocks. The low rate of pass-through ensures that exchange rate shocks do not destabilize the price level. An important feature of low pass-through is that it eliminates the trade-off between output volatility and inflation volatility in the comparison of fixed relative to floating exchange rates.

From Fear of Floating to Benign Neglect: The Exchange Rate Regime Roller Coaster in Pakistan

One of the most pressing issues concerning policymakers today is the choice of an exchange rate regime. Despite the intricacies of this problem, monetary authorities could narrow down their list of options if they were to focus on the following principles: full implementation to ensure credibility and synchronization with domestic realities and economic infrastructure. This paper proposes an optimal exchange rate regime for Pakistan based on a historical study of the outcomes and performance of different monetary stances adopted over the last 40 years.

Labor Market Heterogeneity and Optimal Exchange Rate Regime in Resource-Rich MENA Countries

Although countries of the MENA region are commonly considered as primary-commodity economies, they show sharp dissimilarities in a number of dimensions. Two important dimensions are the size of resource-endowments and the degree of labor market flexibility. Countries such as members of the Gulf Cooperation Council (GCC) and Libya are highly oil-endowed economies with largely flexible labor markets and substantial remittances outflows. While the rest of the MENA countries, such as Egypt, Sudan, Yemen, Algeria, Iran and Iraq, show commonalities in terms of their relatively smaller oil-endowments and the lack of labor market flexibility. This chapter attempts to incorporate the role of labor market flexibility in a unified theoretical framework of optimal exchange rate policies. For that purpose, the paper extends the standard rules-vs.-discretion model of monetary policy to allow for different assumptions about wage rigidities. The analysis suggests that when all prices are exogenous and wages are all optimally indexed to inflation (i.e., labor market flexibility), fixed exchange rate regimes deliver more desirable outcomes in terms of real output, inflation, and insulation against external shocks compared to flexible exchange rate regimes. On the other hand, the fixity of exchange rates combined with rigid goods and labor markets can add to real appreciations.

Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective

This paper examines the choice of optimal exchange rate regime for an oil-exporting small open economy using a welfare-based model. The paper extends the standard New Keynesian Small Open Economy model to include three countries: a small oil-exporting country and two large foreign countries. The model also features three sectors: traded, non-traded, and primary-commodity (crude-oil). The sources of uncertainty are random monetary (demand), productivity (real), and real oil price (supply) shocks. Despite the absence of a non-oil traded sector in this primary-commodity economy, the welfare analysis suggests that flexible exchange rate regimes can reduce external shocks and consumption volatility given certain caveats about pricing-schemes. The analysis also suggests that a basket peg is more welfare-improving than a unilateral peg, as higher volatility of the anchor currency reduces consumer welfare.

Flexibility: Stability's Best Friend in Non-transparent Countries?

This paper proposes a framework for studying the optimal exchange rate regime in an open economy vulnerable to self-fulfilling currency crises. Model results show that the optimal regime a country's government should adopt critically depends on the country's level of transparency. Furthermore, stabilisation properties are conditional on conjectural and time-varying factors such as market sentiments, which swing according to international investors’ feelings. Thus, and paradoxically, in a weakly transparent economy, greater flexibility gives rise to a wide range of exchange-rate stability compared with hard-anchoring regimes. Key to this is the role of expectations coordination during stressful scenarios.

Do Exchange Rate Regimes Matter for Inflation and Exchange Rate Dynamics? The Case of Central America

AbstractThis paper makes an empirical contribution to discussion of the optimal exchange rate regime. Using a new dataset for Central American countries, we compare the dynamics of the real exchange rate (RER) between dollarised and non-dollarised countries. Our results show that the two dollarised countries in the region, El Salvador and Panama, are quite different in terms of RER dynamics. In El Salvador the RER spends more time away from its equilibrium level than in the non-dollarised countries in the region, while the contrary is true for Panama. We also find that inflation persistence is similar in El Salvador to the other countries, but smaller in Panama. This leads us to the conclusion that some degree of exchange rate flexibility helps countries to have a more aligned RER. Nevertheless, a long-lived, highly credible dollarised economy, like Panama, can reduce inflation persistence to such an extent that RER misalignments are in fact less frequent than in countries with more flexible exchange rate regimes.

Currency Devaluation and the Credibility of Fixed versus Flexible Exchange Rate Regimes: The Case of Zimbabwe

This paper evaluates Zimbabwe’s exchange rate policy before and during the post-1997 currency and economic crisis. This is achieved by conducting simulations of an exchange rate regime evaluation model that minimizes the conditional variance of real output following Agbeyegbe and Osakwe (2005). The model captures the link between deviations of the RER from its 'equilibrium' shadow price level and output volatility. The underlying hypothesis is that this ‘link,’ or relation, varies systematically with the exchange rate regime. Using the parallel market rate and an estimated equilibrium real exchange rate (RER) index as alternative shadow prices, the empirical exercise involves estimating the parameters of an aggregate demand and money demand model, and then to simulate the evaluation model to determine the optimal exchange rate regime. The findings show that a flexible rate regime systematically outperforms a fixed exchange rate in the Zimbabwean setting, resulting in more stable output under both measures, even after controlling for the most volatile period of the sample. In view of the emergence of chronic and rising RER overvaluation, and its negative association with output volatility, the paper can infer that the downfall of exchange reforms was that the Reserve Bank followed an inflexible approach to exchange rate management, even at a time when the currency was meant to be floating.

The optimal exchange rate regime for a small country

This paper examines the welfare comparisons between a freely floating, a managed floating, and a pegged exchange rate regime. We compare the expected loss under these regimes by modifying and generalizing Hamada’s (2002) model to accommodate intervention policy. We consider the de jure and de facto classifications, where the former is defined by the officially stated intentions of the monetary authorities, while the latter is based on the actually observed behavior of the nominal exchange rate. We first examine the exchange rate regimes from the central bank’s policy stance and the actual exchange rate policy. Next we assume that the regime which the private sector perceives according to an official announcement may be different from the one adopted actually by the central bank. We examine nine combinations of the de jure and de facto regimes. We interpret that, whenever they are different, there is informational friction between the central bank and the private sector. We show that the welfare level of a small country under freely floating is no less than that under other regimes, and that with some restrictive conditions, the de facto pegged or de facto managed floating is close to freely floating. This partly explains “Fear of floating” and “Fear of pegging”.

An optimum-currency-area odyssey

The theory of optimum-currency-areas was conceived and developed in three highly influential papers, written by Mundell (1961), McKinnon (1963) and Kenen (1969). Those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally-tailored monetary policy and the adjustment of an exchange rate of a national currency. We trace the development of optimum-currency-area theory, which, after a flurry of research into the subject in the 1960s, was relegated to intellectual purgatory for about 20 years. We then discuss factors that led to a renewed interest into the subject, beginning in the early 1990s. Milton Friedman plays a pivotal role in our narrative; Friedman's work on monetary integration in the early 1950s presaged subsequent optimum-currency-area contributions; Mundell's classic formulation of an optimal currency area was aimed, in part, at refuting Friedman's “strong” case for floating exchange rates; and Friedman's work on the role of monetary policy had the effect of helping to revive interest in optimum-currency-area analysis. The paper concludes with a discussion of recent analytical work, using New Keynesian models, which has the promise of fulfilling the unfinished agenda set-out by the original contributors to the optimum-currency-area literature, that is, providing a consistent framework in which a country's characteristics can be used to determine its optimal exchange-rate regime.