Exchange Rate Regime

11 Key excerpts on "Exchange Rate Regime"

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  Monetary Economics in Developing Countries

  • Subrata Ghatak, José R. Sánchez-Fung(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  Yet other studies, like that of Ghosh et al . (2000), have concluded that hard pegs, particularly currency boards, seem to be related to superior economic performance. Additionally, Razin and Rubinstein (2006) argued that an Exchange Rate Regime’s impact on growth depends critically on the likelihood of a crisis affecting that economy. So, overall, the results on which Exchange Rate Regime is best are somewhat mixed and likely to depend, inter alia, on how exchange rate arrangements are classified (a topic dealt with later in this chapter), on country-specific factors that are difficult to capture in cross-country studies, and notably on a country’s phase of economic and financial development (see, for example, Husain et al ., 2005). 10.2 Fixed exchange rates ..................................................................................... Operating a fixed Exchange Rate Regime basically implies that the monetary authorities set the value of the domestic currency with reference to another currency, or a basket of currencies. Thus a fixed Exchange Rate Regime is expected to bring more credibility to the exchange rate stance, which in turn has a positive effect on inflationary expectations. And because announcing a fixed Exchange Rate Regime implies that the central bank will buy or sell the domestic currency at a given rate, the viability of such a regime depends crucially on the level of international reserves held by the authorities. This level is usually gauged in relation to the amount of money circulating in the economy; that is, in relation to the central bank’s liabilities to the rest of the economy. There are several benefits from running a fixed Exchange Rate Regime, including lower currency volatility and thus a more stable environment for international trade. Invest-ment also benefits from the absence of a currency risk premium.

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  Macroeconomics in Emerging Markets

  • Peter J. Montiel(Author)
  • 2011(Publication Date)
  • Cambridge University Press

    (Publisher)

  6 Second, the set of third factors that may influence 6 There is a large body of literature attempting to distinguish de facto from de jure Exchange Rate Regimes; see, e.g., Calvo and Reinhart ( 2002 ), Reinhart and Rogoff ( 2004 ), Levy-Yeyati and Sturzenegger ( 2005 ), and Frankel and Wei ( 2008 ). Tavlas et al. ( 2008 ) provide a useful review of this literature. 434 Exchange Rate Management inflation together with the Exchange Rate Regime is extensive, and it is difficult to be confident that all these have been controlled for. Finally, the Exchange Rate Regime may be endogenous to the country’s inflation performance, if countries with a preference for low inflation for other reasons choose one Exchange Rate Regime over the other. A recent study by Ghosh et al. ( 2003 ) is particularly careful about all these issues. Using a sample of 140 countries with data over 1960–1990, these authors found that the rate of inflation tended to be lower in countries that maintained a fixed exchange rate. On the other hand, the growth rate was lower in countries with fixed exchange rates, despite these countries having higher average rates of investment. This means that they had lower average productivity growth. 7 The conclusion would seem to be that fixed Exchange Rate Regimes (i.e., regimes in the range 4–8 in Box 18.1 ) are probably more effective than floating rate regimes (those in the range 1–3) as commitment devices for central banks and thus that fixed regimes tend to be more successful in promoting medium-run price stability. However, because of the empirical problems just mentioned, and the scarcity of studies that have addressed them, at this point the evidence is at best suggestive rather than conclusive. v. currency crises and the macroeconomic adjustment process As argued, exchange rate policy can affect development indirectly through its effect on macroeconomic stability.

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  Exchange Arrangements and Foreign Exchange Markets : Developments and Issues

  • International Monetary Fund(Author)
  • 2003(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  The remainder of this chapter discusses whether Exchange Rate Regimes based on members’ de facto policies have shifted away from intermediate regimes toward hard peg or floating regimes since 1990 and, if so, in which direction. It also examines whether certain types of Exchange Rate Regimes have been subject to more frequent exits and severe market pressures. It then discusses factors underlying the evolution of Exchange Rate Regimes, including exchange regulations, the monetary policy framework, and integration with international capital markets. The chapter also reviews the experience with the new classification scheme and issues related to its implementation.

  Passage contains an image

  Evolution of Exchange Rate Regimes Since 1990

  There has been a marked shift away from pegged Exchange Rate Regimes toward floating regimes since 1990, as assessed by the official notification of country authorities to the IMF. Based on the IMF’s de jure classification of Exchange Rate Regimes, the share of member countries with pegged Exchange Rate Regimes—including regimes with limited flexibility within a band and the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS)—declined to 44 percent in 1998 from about 65 percent in 1990 (Figure 2.2 and Table 2.1 ). This apparent trend toward greater exchange rate flexibility has been questioned because some countries have targeted or tightly managed their exchange rates in reality, while declaring officially that they were implementing floating regimes. Such deviations between de jure and de facto policies reflected, among other things, the political implications of exchange rate depreciations and concerns about the impact of depreciations on financial and nonfinancial institutions and inflation.2

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  Exchange Rate Regimes in East Asia

  • Masahiro Kawai, Gordon de Brouwer(Authors)
  • 2004(Publication Date)
  • Routledge

    (Publisher)

  11 Exchange Rate Regimes and monetaryindependence in East Asia

  Chang-Jin Kim and Jong-Wha Lee

  INTRODUCTION

  Since the financial crisis in 1997, East Asian countries have faced many new challenges. One is the adoption of an appropriate Exchange Rate Regime and monetary policy under increasing capital market liberalisation. The regimes selected by the Asian countries in the wake of the regional crisis have varied significantly. Some countries opted for fixed Exchange Rate Regimes, either in a hard peg currency board system or in a combined form with restrictions on capital flows. Others preferred a freely floating Exchange Rate Regime.

  Each regime has its own advantages and disadvantages. Fixing the exchange rate helps to reduce transaction costs and exchange rate risks. It can also work as a credible nominal anchor for monetary policy. On the other hand, a floating Exchange Rate Regime allows the domestic monetary authority to pursue an independent monetary policy. The issue of monetary independence under floating exchange regimes, however, has been a topic of controversy. In theory, under a pegged Exchange Rate Regime with unrestricted capital flows, domestic interest rates cannot be set independently. In contrast, a flexible exchange rate arrangement allows the monetary authority to retain domestic interest rates as a policy instrument. But alternative views such as the ‘fear of floating’ theory argue that, even if countries are formally floating, they will not freely move their exchange rates, and so they actually behave much like they would in a pegged system (Calvo and Reinhart 2002).

  Recent empirical studies – including Frankel (1999), Hausman et al. (2001), Borensztein et al. (2001) and Frankel et al. (2002) – formally investigate whether the choice of the currency regime affects monetary policy independence in practice. These studies estimate the sensitivity of local interest rates to changes in international interest rates, examining whether rates are less sensitive to changes under floating Exchange Rate Regimes than under pegged regimes. In principle, under floating regimes, changes in the exchange rates would absorb the effects of international interest ‘rate shocks and thereby provide Insulation’ for domestic interest rates. In the case of East Asian countries, previous studies provide somewhat contrasting results. Borensztein et al. (2001) show that interest rates in Hong Kong, which has a fixed Exchange Rate Regime, react much more to US interest rates than do interest rates in Singapore, which has a floating Exchange Rate Regime. This finding is consistent with the theoretical prediction. In contrast, Frankel et al. (2002) find that in the long run local interest rates are adjusted fully to international interest rates regardless of the Exchange Rate Regime. For East Asian countries, the estimates of the long run sensitivity of local interest rates to US interest rates do not statistically differ from the estimates for Hong Kong, Singapore, Thailand and the Philippines, despite the differences in their exchange regimes.

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  International Finance and The Developing Economies

  • G. Bird(Author)
  • 2003(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The purpose of this chapter is to offer a judgement on alternative Exchange Rate Regimes for developing and emerging economies, informed by experi- ence since the early 1990s. 3 It explores some of the lessons that may be learned from the currency crises that have occurred, and examines their implications for the design of IMF conditionality. The following section briefly summarises the range of choices regarding Exchange Rate Regimes. The next section explores the principal analytical issues raised by them. Much of the underlying material is quite familiar and an attempt is therefore made here to offer something other than a simple litany of the possible advantages and disadvantages of the various regimes. The fourth section investigates the extent to which the choice of Exchange Rate Regime really matters. The following section then goes on to summarise the choice of exchange rate policy amongst a number of developing and emerging economies and how it has changed over recent years. It revisits the theoretical issues in the context of evidence drawn from Africa, Asia and Latin America, and attempts to identify the principal lessons that emerge. The final section offers a few concluding remarks that attempt to place exchange rate policy more generally in the context of macroeconomic policy and to examine the implications for the design of IMF conditionality. The available options There is a spectrum of choice when it comes to Exchange Rate Regimes. At one end, there is free floating, where a government opts not to intervene at all in the foreign exchange market to influence the price of the currency. 36 International Finance and the Developing Economies In effect there is no exchange rate policy and no target in terms of the value of the currency. The exchange rate is left ‘to find its own level’ and does not constrain domestic macroeconomic policy. At the other end there is immutable fixity, in the form of a currency union or dollarisation.

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  International Finance

  For Non-Financial Managers

  • Dora Hancock(Author)
  • 2018(Publication Date)
  • Kogan Page

    (Publisher)

  05

  Exchange Rate Regimes

  At the end of this chapter you will be able to:

  • critically evaluate fixed and floating exchange rates;
  • discuss the criteria used by countries to determine their optimal Exchange Rate Regime;
  • explain the concept of the impossible trinity.

  Introduction

  One of the tasks of almost all governments is to decide on their exchange rate policy and then to arrange for its implementation.

  This is an important and complex decision. As we saw in Chapter 3 , historically there was an emphasis on stable exchange rates because it was thought that stable exchange rates helped to create a stable economy and increase international trade.

  While stable exchange rates are still seen as being desirable it has become apparent that there are other desirable features of exchange rate systems; unfortunately it is not possible to have them all at the same time.

  In this chapter we will discuss the range of Exchange Rate Regimes used around the world today. We will evaluate the benefits and disadvantages of many of them and try to understand why different countries use different exchange rate systems.

  At one extreme are fixed exchange rates where governments fix the amount of currency of one or more other countries that can be exchanged for their currency. Sometimes the fixed rate is legally binding on a government; at other times the government retains the freedom to change the fixed rate.

  At the other extreme is a pure floating rate system where governments adopt a laissez-faire approach to exchange rates. As we will see, in practice countries often choose a policy which is not at one of these two extremes.

  How do exchange rates work?

  The UK uses indirect quotes for exchange rates. Today’s exchange rate with the dollar is £1:$1.4619. Indirect quotes tell us how much foreign currency is needed to buy one unit, in this case £1, of the domestic currency.

  In contrast, direct quotes tell us how much domestic currency one unit of foreign currency will buy. For example, in the United States the exchange rate with the euro today is $1.11107:€1.

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  Economic and Financial Crises in Emerging Market Economies

  • Martin Feldstein(Author)
  • 2007(Publication Date)
  • University of Chicago Press

    (Publisher)

  I will give you a brief summary of what I believe are the main factors that one should look for in understanding such crises based on my academic, policy, and market experience. Exchange Rate Regimes 81 My view is that most crisis situations have as a basic feature weak balance sheets. The weakness can be found at the government level or in the private sector, and it typically includes situations in which countries or banking sectors borrow short-term to finance development or long-term invest-ments. The interesting question, therefore, is what causes weak balance sheets? The answer can be split into micro and macro reasons. On the micro side—the topic of our next session, with Frederic S. Mishkin’s paper—we must discuss financial regimes, including banking, corporate governance is-sues, and so on. On the macro side, the range of topics covered includes weak fiscal regimes, which are the root cause of many crises, and also prob-lems with monetary regimes and Exchange Rate Regimes. (I will use the last two terms to refer to the same thing.) In the end, there can only be one nom-inal anchor, as we know. Let me begin with a classification of Exchange Rate Regimes. I will use the word fixed for super-fixed. Fixed to me means that there is a clear commit-ment, perhaps institutionalized through a currency board or a regional agreement. This di ff ers from what Domingo Cavallo was saying. His em-phasis was more on convertibility, and I think the policy debate in the liter-ature has tended to focus more on fixity, rather than convertibility. Managed will be the second of three regimes, one in which there is a target. It can be a target rate or band or path or whatever. Floating will then be everything else where there is no target, but where some degree of intervention or lean-ing against the wind may be allowed, provided there is no target. There must really be no target, whether it be announced or not, which is something that is not easy to verify.

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  Flexible Exchange Rates

  • Jan Herin(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  INFLATION AND THE Exchange Rate Regime* W. Max Corden Nuffield College, Oxford, England Abstract Is a regime of fixed or of flexible rates more conducive to inflation? In a flexible rate regime the authorities of each country can choose whatever rate of inflation they wish. In the fixed rate system countries can depart from the world rate of inflation by running payments imbalances and will trade-off the costs of accom-modating borrowing or lending against the benefits from getting closer to their desired inflation rates; inflation rates are then determined in a general equilibrium system where countries trade their surpluses and deficits. Inflation-prone countries are distinguished from the inflation-shy. Account is also taken of the special case of the reserve currency country. Introduction The purpose of this paper is to sort out the relationship between inflation and the Exchange Rate Regime. Are fixed or flexible rates more conducive to infla-tion? The focus is not on the well-known subject of the international inflation transmission process in the fixed rate system, nor on analysing the conse-quences of given monetary expansions in different countries (a matter much discussed by monetarists) but rather on the outcome of policy adjustments by fiscal and monetary authorities which are designed to bring about what-ever transmission of, or insulation from, external inflation these authorities desire. The aim is also to show how the various inflation rates are determined in a fixed rate system when there are many different monetary authorities interacting on the rates chosen by different countries.l The polar systems of rigidly fixed rates and perfectly flexible rates will be compared here. In fact the world has moved along the continuum between * I am indebted to val•1ab!e comments on an earlier draft from Herbert Grubel and John Martin. This paper is a revised version of the paper presented at the Conference.

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  The Macroeconomy of Central America

  • R. Rennhack, E. Offerdal, R. Rennhack, E. Offerdal(Authors)
  • 2004(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Moreover, an exchange rate peg would probably lack cred- ibility if inflationary expectations were to remain high. ● The extent of capital mobility: Countries with a high degree of capi- tal mobility tend to encounter difficulties in sustaining a so-called soft exchange rate peg. As a result they face two options: opt for a hard exchange rate peg (dollarization or a currency board) and give up an independent monetary policy; or adopt a flexible exchange regime and gain some degree of monetary independence. ● Stance of fiscal policy: Countries with a history of high fiscal deficits tend to adopt flexible regimes, because concerns about fiscal sustain- ability tend to undermine confidence in an exchange rate peg. 170 Robert Rennhack et al. ● The degree of currency substitution: A high degree of currency substi- tution pushes a country in the direction of adopting an exchange rate peg. In these kinds of countries, the effectiveness of monetary policy is limited and unhedged foreign currency-denominated debt may be sizable. ● Volatility in the terms of trade: Countries with volatile terms of trade, especially those that depend on a few export products, tend to rely on a flexible Exchange Rate Regime to help absorb the effects of those shocks. ● Diversification of the economy: Diversified countries would tend to opt for flexible regimes to help ensure that the exchange rate helps protect the competitiveness of exports, on average. ● Per capita GDP: Larger developed countries tend to have deeper financial markets and stronger institutions and are better able to support a flexible exchange rate. It is important to add that historical factors can also play a role in the choice of Exchange Rate Regime. A country that has maintained an Exchange Rate Regime for many years faces a cost in making the tran- sition to a new regime, which must be factored into the decision.

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  The Economics of Adjustment and Growth

  Second Edition

  • Pierre-Richard Agénor, Pierre-Richard Agénor(Authors)
  • 2004(Publication Date)
  • Harvard University Press

    (Publisher)

  The last e ect appeared to be the main factor explaining the size of the di erential. In addition, fi scal de fi cits and the volatility of in fl ation were also lower under currency board arrangements. Finally, Broda (2001) used a sample of 74 developing countries for the period 1973-96 to assess whether the response of real output, real exchange rates, and in fl ation to terms of trade shocks di er systematically across Exchange Rate Regimes. He found that the behavior of both output and the real exchange Exchange Rate Regimes 179 rate di ered signi fi cantly. Under fi xed Exchange Rate Regimes, negative terms-of-trade shocks are followed by large and signi fi cant losses in terms of growth, whereas the real exchange rate begins to depreciate only after two years. By contrast, under fl exible regimes, output losses are smaller and real depreciations are large and immediate. These results seem to con fi rm the conventional view that fl exible Exchange Rate Regimes are able to “bu er” real shocks better than fi xed regimes. 5.3.3 A Practical Guide The foregoing discussion suggests that there are a number of factors that policy-makers should consider in choosing an Exchange Rate Regime. As pointed out by Argy (1990) and Eichengreen and Masson (1998), these factors may be di cult to measure and may con fl ict with each other; the ultimate decision may thus depend on the relative weight attached to each of them in policymakers’ prefer-ences. In addition, these weights may change over time. Nevertheless, relevant factors to ponder in selecting an exchange rate arrangement in practice include: • The size and degree of openness of the economy. The higher the share of trade in output (as measured, for instance, by the share of exports and imports in GDP), the higher the costs of exchange rate volatility. Thus, small, highly open economies should opt for a pegged Exchange Rate Regime.

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  The Jingshan Report

  Opening China's Financial Sector

  • China Finance 40 Forum Research Group(Author)
  • 2020(Publication Date)
  • ANU Press

    (Publisher)

  145 4 RMB Exchange Rate: Moving Towards a Floating Regime Zhang Bin 1 Introduction The RMB exchange rate formation mechanism has undergone frequent adjustments since the 1980s, with the transition from a double-track exchange rate system to a single exchange rate system, a de facto fixed regime (pegged to the USD) during the financial crisis, as well as many attempts in normal periods to reform the Exchange Rate Regime so that it can respond to market changes. The major challenge is that the exchange rate does not respond adequately to changes in market supply and demand. When the exchange rate deviates from economic fundamentals, expectation for one-way currency fluctuation and large-scale capital flow follow. Authorities are then forced to intervene in the foreign exchange market. This affects the independence and effectiveness of monetary policy and also jeopardises domestic economic stability. Additionally, regular intervention in the foreign exchange market has negative effects on economic upgrading, RMB internationalisation and outbound investment. Since the beginning of 2017, supply and demand in the foreign exchange market have been more balanced, and the time is right for further reform. International experience suggests that reducing intervention in the foreign 1 Senior Fellow at the China Finance 40 Forum. THE JINGSHAN REPORT 146 exchange market will not lead to a large depreciation of the RMB, given China’s economic fundamentals. Two strategies can be used to introduce a floating Exchange Rate Regime: free-floating regime, and allowing a wide band for the RMB exchange rate fluctuation against a basket of currencies. The latter could well be a transition plan towards a free-floating regime.

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