Exchange rate regimes and national price levels

This paper explores the role of exchange rate regimes in explaining deviations from the classic theory of purchasing power parity. Examining a broad panel of countries, I find that developing countries with fixed exchange rate regimes have national price levels that are 20 percent higher than those with flexible regimes. For industrial countries, the relation between regimes and price levels is qualitatively similar but weaker. I investigate several explanations for this pattern, and find that exchange-rate overshooting in floats, inflation inertia in pegs and expansionary policies can explain only 5 percentage points of the observed differences. I also show that even though the observed pattern could be the outcome of a class of open economy models pioneered by Obstfeld and Rogoff, the data provides limited empirical support for the predictions of this model.     

Into the Mussa puzzle: monetary policy regimes and the real exchange rate in a small open economy

Industrial countries moving from fixed to floating exchange rate regimes experience dramatic rises in the variability of the real exchange rate. This evidence, forcefully documented by Mussa [Nominal exchange regimes and the behavior of real exchange rates: evidence and implications. Carnegie-Rochester Conference Series on Public Policy 25 (1986) 117], is a puzzle because it is hard to reconcile with the assumption of flexible prices. This paper lays out a dynamic general equilibrium model of a small open economy that combines nominal price rigidity with a systematic behavior of monetary policy able to approximate a continuum of exchange rate regimes. A version of the model with complete exchange rate pass-through is broadly consistent with Mussa’s findings. Most importantly, this holds independently of the underlying source of fluctuations in the economy, stressing the role of the nominal exchange rate regime per se in affecting the variability of the real exchange rate. However, only a model featuring incomplete exchange rate pass-through can account for a broader range of exchange rate statistics. Finally there exist ranges of values for either the degree of openness or the elasticity of substitution between domestic and foreign goods for which the baseline model is also consistent with the empirical insensitivity of output volatility to the type of exchange rate regime, as documented by Baxter and Stockman [Journal of Monetary Economics 23 (1989) 377].     

The impact of exchange rate regimes on economic growth: Empirical study of a set of developing countries during the period 1974–2006

An increment in the quantity of services/goods manufactured per-head of the population over time denotes economic growth of a country. Exchange Rate Intermediate Regimes are unable to continue under conditions of capital movement. To examine the relationship between exchange rate regimes and economic growth. This study has kept its focus on the economic growth of a set of developing countries during the years (1974–2006). Fixed effects and pooled regression for 16 developing countries have been incorporated as the methodologies techniques for data. Analysis of data was performed through SPSS. A relationship between exchange rate regimes and economic growth has been identified through statistical approaches. The results indicated that as compared to flexible exchange regime, growth rate was higher by 1.2% when fixed exchange regime was adopted; and a growth rate of 0.64% was achieved under the intermediate regime when compared with the flexible regime. A positive impact has been identified in exchange rate regimes upon economic growth of the developing countries. Countries following the flexible exchange rates are facing scarcity for the existence of advanced financial systems, which deprives them of enjoying the benefits of flexible regime.     

Terms of trade and exchange rate regimes in developing countries

Since Friedman [Essays in Positive Economics, University of Chicago Press, Chicago (1953) 157-203] an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks. I use a post-Bretton Woods sample (1973-96) of 75 developing countries to assess whether the responses of real GDP, real exchange rates, and prices to terms-of-trade shocks differ systematically across exchange rate regimes. I find that responses are significantly different across regimes in a way that supports Friedman’s hypothesis. The paper also examines the importance of terms-of-trade shocks in explaining the overall variance of output and prices in developing countries.     

Currency risk in emerging equity markets

The paper develops an international capital asset-pricing model (ICAPM), which includes foreign currency risk, and examines the impact of capital market liberalisation on the pricing of risks. It applies the model to data from Pacific Basin financial markets and finds substantial evidence that not only currency risk is priced in both pre- and post-liberalisation periods, but the model is superior to one which does not include currency risk. This evidence suggests that an international capital asset-pricing model, which omits currency risk, will be misspecified. Furthermore, the results imply that since currency risk is priced and investors are compensated for bearing such risk they should not be discouraged by more flexible exchange rate regimes from investing in emerging markets.     

On the Link Between Exchange‐rate Regimes,Capital Controls and Monetary Policy Autonomy in Small European Countries, 1979–2000

We investigate international monetary‐policy transmission under different exchange‐rate and capital‐account regimes in eleven small, open economies during the 1980s and 1990s. We find no systematic link between ex‐post monetary‐policy autonomy and exchange‐rate regimes. Capital controls appear to have provided a degree of temporal insulation from foreign monetary policy shocks, though not strict autonomy. The results are consistent both with short‐term autonomy for small countries even under fixed exchange rates and an open capital account, and with long‐term dependence under flexible exchange rates and an independent stability target. Results also indicate that euro‐area market interest rates are significantly more responsive to the development of the corresponding US rate than were the previous national rates.     

Segmented asset markets and optimal exchange rate regimes

This paper revisits the issue of the optimal exchange rate regime in a flexible price environment. The key innovation is that we analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented). Under this friction alternative exchange rate regimes have different implications for real allocations in the economy. In the context of this environment we show that flexible exchange rates are optimal under monetary shocks and fixed exchange rates are optimal under real shocks.     

Real effects of collapsing exchange rate regimes: an application to Mexico

This paper examines the impact of collapsing fixed, permanently fixed, and flexible exchange rate regimes on real output. Much of the recent discussion of the causes of exchange rate regime collapses has focused on capital flows and export demands. In an environment in which such external shocks predominate, a flexible exchange rate is shown theoretically to produce lower output variability for a range of parameter values. A counterfactual exercise is performed using Mexican data. We find that had Mexico been on a flexible rate for the past two decades, the variance of real output would have been reduced by half.     

Markov switching GARCH models of currency turmoil in Southeast Asia

This paper analyzes exchange rate turmoil with a Markov switching GARCH model. We distinguish between two different regimes in both the conditional mean and the conditional variance: “ordinary” regime, characterized by low exchange rate changes and low volatility, and “turbulent” regime, characterized by high exchange rate devaluation and high volatility. We also allow the transition probabilities to vary over time as functions of economic and financial indicators. We find that real effective exchange rates, money supply relative to reserves, stock index returns, and bank stock index returns and volatility contain valuable information for identifying turbulent and ordinary periods.     

VARIABLE MARKUP IN A SMALL OPEN ECONOMY WITH INFLATION

This paper analyzes markup disturbances in a small open economy with flexible exchange rates and secular inflation. Specifically, I assume that the private sector fully controls a variable markup over costs. The markup is shown to vary (pro)anticyclically depending on the magnitude of the initial jump in the exchange rate following the disturbance.     

Price mechanism and endogenous productivity in an open economy stock‐flow consistent model

This paper combines a Stock‐Flow Consistent open economy two‐country model with the Verdoorn‐Kaldor law, which posits a positive relationship between the rate of growth of output and productivity growth. The model shows the role of endogenous productivity as a shock magnifier and underlines the limits of the mechanisms of adjustment that rely exclusively on the “buffer” provided by flexible exchange rates. It also provides arguments in support of fiscal policy both in the context of flexible exchange rates and fixed exchange rates. Finally, it challenges the sustainability of austerity measures aimed to achieve external balance.     

India and the Impossible Trinity

In the 1990s, India responded to the well‐known trilemma of macroeconomic policy by adopting an intermediate exchange rate system combined with selective capital controls. This regime enabled the country to balance exchange rate stability, exchange rate targeting and monetary autonomy, and to weather successfully various shocks that included contagion from the East Asian crisis. India's experience serves to reinforce doubts about the desirability of bipolar exchange rate regimes for developing countries as an integral element of a new international financial architecture.     

The dynamics of exchange rate regimes: Fixes, floats, and flips

The impermanence of fixed exchange rates has become a stylized fact in international finance. The combination of the “mirage” view that pegs do not really peg with the “fear of floating” view that floats do not really float generates the conclusion that exchange rate regimes are, in practice, unimportant for the behavior of the exchange rate. This is consistent with evidence on the irrelevance of exchange rate regimes for general macroeconomic performance. Recent studies, however, show that the exchange rate regime matters. This can be understood by considering the dynamics of exchange rate regimes. We demonstrate that the “mirage” view is somewhat misleading and incomplete. Pegs frequently break, but many do last. Also, there is a high degree of flipping, that is, the re-formation of pegs that have broken. Thus, a fixed exchange rate today is a good predictor that one will exist in the future. We also investigate the quantitative effect of fixed exchange rates. While the “fear of floating” view suggests little actual difference in fixed and floating rates with respect to exchange rate volatility, we show that fixed exchange rates exhibit considerably greater bilateral exchange rate stability than flexible rates, both today and in the future.     

Cross country effects of sterilization,reserve currencies,and foreign exchange intervention

This study examines the international repercussions of national sterilization policies under fixed exchange rates and managed flexibility. Using a stochastic framework, the study shows how sterilization, or the use of a reserve currency with the automatic sterilization which that implies, modifies the impact of balance of payments disturbances on key financial variables in the domestic and foreign countries. In both exchange rate regimes, sterilization by the foreign country imposes costs on the domestic country by magnifying the impact of balance of payments disturbances on the domestic financial market.     

The Choice of Exchange Rate Regime and the Volatility of Exchange Rates after the Asian Crisis: A Counterfactual Analysis

The objective of this paper is to carry out a counterfactual analysis of the impact of alternative exchange rate regimes on the volatility of the nominal effective exchange rate (NEER) and the bilateral rate against the US dollar for nine East Asian countries after the Asian financial crisis. Our hypothetical regimes include a unilateral basket peg (UBP), a common basket peg (CBP) and a hard peg against the dollar. We find that a UBP would minimise effective exchange rate volatility for all countries and provides the highest regime gains compared to actual. Although the gains for a CBP are always less than those for a UBP, the absolute differences between the two regimes appear to be small. In terms of the bilateral relationship against the dollar, the gains from a UBP or CBP could be quite significant for the non‐dollar peggers since a fall in effective instability would be accompanied by a fall in bilateral instability.     

China's exports,export tax rebates and exchange rate policy

This paper examines the relationship between China's exports, export tax rebates and exchange rate policy. It offers an explanation for why China's exports continued to rise under RMB real appreciations during the Asian financial crisis. Based on a traditional export demand model, we test our hypothesis that the counteracting effects of China's export tax rebate policy have diminished the effectiveness of real exchange rates in facilitating the resolution of trade imbalances under the current pegged exchange rate regime. We find evidence that RMB real appreciations during the crisis negatively affected China's exports, but the negative effects were mitigated by the positive effects of export tax rebates. We also find evidence of a long‐run relationship between China's exports and the other explanatory variables. The empirical evidence suggests that under the pegged exchange rate regime with limited adjustments, real exchange rate movements alone cannot resolve China's external imbalances. The policy implication of this study is that China needs to redirect its decades‐long export‐oriented development strategy to one that emphasises domestic demand‐oriented development and to replace the current pegged exchange rate regime with a market‐oriented more flexible exchange rate regime.     

人民币汇率、国内外经济状况与我国贸易收支——基于Markov区制转换VAR模型的实证研究

本文采用1994年到2010年的季度数据,通过将贸易收支分解为一般贸易和加工贸易,运用MSIH(2)-VARX(1)模型研究了在人民币汇率存在升值压力和存在贬值压力两种区制下,人民币汇率和国内外经济状况对我国一般贸易收支和加工贸易收支的影响,并在模型中分析了两次金融危机对我国贸易收支的影响。实证结论表明:(1)1994年第三季度到1998年年底,以及2004年第四季度到2008年第四季度,人民币实际有效汇率存在升值压力;1999年第一季度到2004年第三季度,以及2009年第一季度到2010年第四季度,人民币实际有效汇率存在贬值压力;(2)2008年金融危机对贸易收支的影响要大于1998年金融危机;(3)人民币实际有效汇率对一般贸易收支的影响不存在J曲线效应,而对加工贸易收支的影响存在J曲线效应,但综合起来,人民币实际有效汇率变动对总体贸易收支不产生影响。国内外经济状况对我国贸易收支的影响并不是很显著;(4)人民币实际有效汇率变动将导致我国经济增长的负向响应,即人民币实际有效汇率升值不利于我国经济增长。     

The Effect of Government Ideology on an Exchange Rate Regime: Some International Evidence

This paper comprehensively investigates the effect of government ideology on the type of exchange rate regime that a country implements via multinomial logit and multinomial probit models for 147 countries in the period 1974–2009. Our results clearly indicate that a left‐wing government increases the likelihood that a country implements a flexible regime in the classifications of exchange rate regimes. Nevertheless, evidence is weaker when using the de jure IMF course classification, which is set up by Ilzetzki et al. ( 2008 ). In a deeper investigation, we find that left‐wing governments are more likely to choose a flexible regime relative to a fixed one in our sample of OECD, non‐OECD and non‐Eurozone countries, as the impacts from government ideology on the determinant of the choice of exchange rate regime in Eurozone countries disappear. More importantly, we present many explanations for exchange rate regime choices when macroeconomic conditions, political constraints and institutions impact the choice of exchange rate regime.