definition consistent measurement of exchange market pressure currencies can be under severe pressure but in a managed exchange rate regime that is not fully visible via the change in the exchange rate the literature has proposed a way to measure such exchange market pressure emp indirectly by adding interest rate changes and forex interventions to the exchange rate change we demonstrate that this measure is not consistent with the definition of emp and develop a new measure that is consistent this is first derived within the commonly used monetary exchange rate model then we generalize the analysis by avoiding the use of an exchange rate model we find that the interest rate should not be taken in the first difference form used so far but rather in level form and relative to the interest rate chosen if the country had no exchange rate objective applications on the european monetary system and east asian crises confirm that this improvement is highly relevant in practice

to float or to fix evidence on the impact of exchange rate regimes on growth we study the relationship between exchange rate regimes and economic growth for a sample of 183 countries over the post bretton woods period using a new de facto classification of regimes based on the actual behavior of the relevant macroeconomic variables in contrast with previous studies we find that for developing countries less flexible exchange rate regimes are associated with slower growth as well as with greater output volatility for industrial countries regimes do not appear to have any significant impact on growth the results are robust to endogeneity corrections and a number of alternative specifications borrowed from the growth literature

fixing exchange rates a virtual quest for fundamentals abstract fixed exchange rates are less volatile than floating rates but the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes this suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful it also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability

de facto exchange rate regimes and currency crises are pegged regimes with capital account liberalization really more prone to speculative attacks abstract this paper empirically examines whether de facto exchange rate regimes affect the occurrence of currency crises in 84 countries over the 1980 2001 period by using the probit model we employ the de facto classification of reinhart and rogoff 2004 that allows us to estimate the impact of relatively long lived exchange rate regimes on currency crises with much greater precision we find that pegged regimes significantly decrease the likelihood of currency crises compared with floating regimes by using the combined data of exchange rate regimes and the existence of capital controls we also find interesting evidence that pegged regimes with capital account liberalization significantly lower the likelihood of currency crises compared with other regimes these results are robust to a wide variety of samples and models from the standpoint of the macroeconomic policy trilemma we can conjecture that pegged regimes with capital account liberalization are substantially less prone to speculative attacks because they can enhance greater credibility in their currencies by abandoning monetary policy autonomy

currency misalignments and growth a new look using nonlinear panel data methods the aim of this article is to investigate the link between currency misalignments and economic growth relying on panel cointegration techniques we calculate real exchange rate rer misalignments as deviations of actual rers from their equilibrium values for a set of advanced and emerging economies estimating panel smooth transition regression pstr models we show that rer misalignments have a differentiated impact on economic growth depending on their sign whereas overvaluations negatively affect economic growth rer undervaluations significantly enhance it this result indicates that undervaluations may drive the exchange rate to a level that encourages exports and promotes growth

crises and exchange rate regimes time to break down the bipolar view we revisit the link between crises and exchange rate regimes err using a panel of 90 developed and developing countries over the period 1980 2009 we find that corner err are not more prone to crises compared to intermediate err this finding holds for different types of crises banking currency and debt and is robust to a wide set of alternative specifications consequently we clearly break down the traditional bipolar view countries that aim at preventing crisis episodes should focus less on the choice of the err and instead implement sound structural macroeconomic policies

a pragmatic approach to capital account liberalization in the mid 1990s mainstream economists of nearly all stripes commonly recommended capital account liberalization that is allowing a free flow of funds in and out of a country s economy as an essential step in the process of economic development but then came the east asian financial crisis of 1997 98 in which even seemingly healthy and well managed economies like those of south korea were engulfed by massive capital outflows and tremendous currency volatility and capital account liberalization became quite controversial in the economics profession a decade later now that time has quelled passions and intervening research can shed more light on the debate it appears that both the costs and benefits of capital account liberalization may have been misunderstood in that earlier debate now it appears that the main benefits of capital account liberalization for emerging markets are indirect more related to their role in building other institutions than to the increased financing provided by capital inflows and these indirect benefits are important enough that countries should look for creative approaches to capital account liberalization that would help attain these benefits while reducing the risks countries don t have much choice but to plan for capital account liberalization because capital accounts are de facto becoming more open over time whatever governments may do to try to control them

pegged exchange rate regimes a trap this paper studies the empirical and theoretical association between the duration of a pegged exchange rate and the cost experienced upon exiting the regime we confirm empirically that exits from pegged exchange rate regimes during the past two decades have often been accompanied by crises the cost of which increases with the duration of the peg before the crisis we explain these observations in a framework in which the exchange rate peg is used as a commitment mechanism to achieve inflation stability but multiple equilibria are possible we show that there are ex ante large gains from choosing a more conservative not only in order to mitigate the inflation bias from the well known time inconsistency problem but also to steer the economy away from the high inflation equilibria these gains however come at a cost in the form of the monetary authority s lesser responsiveness to output shocks in these circumstances using a pegged exchange rate as an anti inflation commitment device can create a trap whereby the regime initially confers gains in anti inflation credibility but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy we also show that the more conservative is the regime in place and the larger is the cost of regime change the longer will be the average spell of the fixed exchange rate regime and the greater the output contraction at the time of a regime change

yen or yuan the law of one price and economic integration in asia using highly comparable local retail prices of 146 goods and services across 18 asian countries over 1990 2014 we analyse price dispersion and test convergence to the law of one price lop for these prices around three price benchmarks asia average japan and china prices to gain insight about market integration in overall asia as well relative integration of asian economies to japan and china cross asia price dispersion around china price benchmark for both tradables and non tradables diminishes significantly over the sample period whereas that around japan price benchmark increases considerably particularly after the 2008 crisis there is convergence to the lop for about half of goods and services in china and asia average price benchmarks the percentage of convergent prices is significantly smaller in japan price benchmark direct estimates of the convergence speed parameter also confirm these observations overall our results show evidence of increasing economic integration in asia in the last two decades the process of price convergence appears to be driven by the emergence of china as the centre of economic gravity in the region there is much room for improvement as economic integration in asia is still far below that in europe in the 1990s or usa in the 1980s

international financial crises causes prevention and cures dale jorgenson has bestowed a great honor and no small challenge by inviting me to give this lecture a great honor because of the distinguished list of economists who have preceded me a challenge because of the standard they have set and because there is no greater challenge for any economist than providing a coherent account of significant events to his scientific peers i am sometimes asked by friends about the differences between academic life and life as a public official there are many two stand out first as an academic the gravest sin one can commit is to sign one s name to something one did not write as a public official it is a mark of effectiveness to do so as often as possible second as an academic if a problem is too hard and does not admit of a satisfactory solution there is an obvious response work on a different problem that is not a luxury that one has in government i have been reminded of this often in recent years as we have grappled with financial crises in a number of what had previously been considered emerging markets with unrestrained futures anyone who doubts the social importance of what economists do should consider the debates surrounding these crises hundreds of millions of people who expected rapidly rising standards of living have seen their living standards fall hundreds of thousands if not millions of children have been forced to drop out of school and go to work hundreds of billions of dollars of apparent wealth has been lost the stability of large nations as nations has been called into question and the united states has made its largest nonmilitary foreign policyrelated financial commitments since the marshall plan almost all the issues involved in understanding preventing and mitigating these crises are the stuff of economics courses and research fixed versus flexible exchange rates moral hazard and multiple equilibria speculation and liquidity fiscal and monetary policies regulation and competition what economists think say and do has profound implications for the lives of literally billions of their fellow citizens whether it is discussing the role of derivatives in signaling exchange rate commitments with chinese premier zhu rongji or discussing an nber working paper on inflation targeting with the brazilian central bank governor arminio fraga or discussing alternative approaches to bankruptcy law with indonesia s economic team or optimal debt durations with the mexican authorities i am consistently struck by the impact of the kind of research discussed at the aea meetings the future well being of the world s people in large part will depend on how the ongoing process of global integration works out this is a strong statement but one that is supported by the global economy s post world war i failure and its post world war ii success central to global integration is financial integration the flow of funds and of capital across international borders and as the events of the late 1920 s and early 1930 s remind us central to global disintegration can be international financial breakdowns today i want to reflect on the issue of global financial integration in light of the dramatic and largely unpredicted events of recent years it is perhaps a good time for reflection there has been enough repair that priority can shift from u s department of the treasury 1500 pennsylvania avenue washington dc 20005 this lecture reflects many things i have learned from experiences i have shared with colleagues in the united states government and governments around the world i thank brad delong marty feldstein stephanie flanders ken rogoff andrei shleifer and ted truman for useful comments and suggestions i am especially grateful to nouriel roubini and stephanie flanders for valuable discussions and assistance in the preparation of this lecture the usual disclaimer applies

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed

the mirage of fixed exchange rates this paper discusses the profound difficulties of maintaining fixed exchange rates in a world of expanding global capital markets contrary to popular wisdom industrialized country monetary authorities easily have the resources to defend exchange parities against virtually any private speculative attack but if their commitment to use those resources lacks credibility with markets the costs to the broader economy of defending an exchange rate peg can be very high the dynamic interplay between credibility and commitment is illustrated by the 1992 swedish and british crises and the 1994 95 mexican collapse we also discuss the small number of successful fixers

classifying exchange rate regimes deeds vs words abstract most of the empirical literature on exchange rate regimes uses the imf de jure classification based on the regime announced by the governments despite the recognized inconsistencies between reported and actual policies in many cases to address this problem we construct a de facto classification based on data on exchange rates and international reserves from all imf reporting countries over the period 1974 2000 which we believe provides a meaningful alternative for future empirical work on the topic the classification sheds new light on several stylized facts previously reported in the literature in particular we find that the de facto pegs have remained stable throughout the last decade although an increasing number of them shy away from an explicit commitment to a fixed regime hidden pegs we confirm the hollowing out hypothesis but show that it does not apply to countries with limited access to capital markets we also find that pure floats are associated with only relatively minor nominal exchange rate volatility and that the recent increase in the number of de jure floats goes hand in hand with an increase in the number of de facto dirty floats fear of floating

sudden stops banking crises and investment collapses in emerging markets abstract we evaluate whether financial openness leaves emerging market economies vulnerable to the adverse effects of capital reversals sudden stops on domestic investment we investigate this claim in a broad sample of emerging markets during the period 1976 2002 if the banking sector does not experience a systemic crisis sudden stop events fail to have a significant impact on investment bank crises on the other hand have a significant negative effect on investment even in the absence of a contemporaneous sudden stop crisis we also find that openness to capital flows worsens the adverse impact of banking crises on investment our results provide statistical support for the policy view that a strong banking sector which can withstand the negative fallout of capital flight is essential for countries that open their economies to international financial flows

exchange rate regimes in developing and emerging economies and the incidence of imf programs summary the global economic crisis will compel many countries to revise key economic policies including their exchange rate regime the international monetary fund will have significant influence on their choices and has exhibited a bias against intermediate regimes we examine the link between exchange rate regimes and imf program use and find no evidence that countries with intermediate exchange rate regimes require more frequent imf assistance rather they appear somewhat less dependent especially when compared to fixed exchange rates our results suggest that intermediate regimes should remain a viable and possibly desirable exchange rate choice for some countries

exchange rate regime durability and performance in developing versus advanced economies abstract drawing on new data and advances in exchange rate regimes classification we find that countries appear to benefit by having increasingly flexible exchange rate systems as they become richer and more financially developed for developing countries with little exposure to international capital markets pegs are notable for their durability and relatively low inflation in contrast for advanced economies floats are distinctly more durable and also appear to be associated with higher growth for emerging markets our results parallel the baxter and stockman classic exchange regime neutrality result though pegs are the least durable and expose countries to higher risk of crisis

words deeds and outcomes a survey on the growth effects of exchange rate regimes abstract recent studies on the growth effects of exchange rate regimes offer a wide range of different sometimes contradictory results in this paper we systematically compare three prominent contributions in this field using a common data set a common specification and common estimation methods we argue that the contradictory findings can be explained by the fact that these studies use regime classifications which reflect fundamentally different aspects of exchange rate policy

the role of financial development in exchange rate regime choices abstract we make the first attempt in the literature to empirically investigate the role of financial development in the choice of exchange rate regimes using a binary choice model we first show that financially less developed countries are more likely to adopt a fixed exchange rate to further examine the impact of financial development on the conditional probability of exiting from an existing pegged system to a flexible one we then employ hazard based duration analysis we find strong evidence that countries with higher levels of financial development are more likely to exit a pegged system and interestingly financial development only matters to orderly exits but not disorderly exits our results are robust to controlling for endogeneity and sample selection

distinguished lecture on economics in government exchange rate regimes is the bipolar view correct the choice of appropriate exchange rate regime which for economies with access to international capital markets increasingly means a move away from the middle ground of pegged but adjustable fixed exchange rates towards the two corner regimes of either flexible exchange rates or a fixed exchange rate supported if necessary by a commitment to give up altogether an independent monetary policy lawrence h summers 2000 p 8

explaining the duration of exchange rate pegs abstract this paper is an empirical investigation of the duration of exchange rate pegs in 16 latin american countries and jamaica we identify factors that influence peg duration using logit analysis the real exchange rate and the level of international liquidity are significant determinants of the monthly likelihood of devaluation structural variables such as the openness of an economy and its geographical trade concentration and political variables such as changes in the executive also significantly affect the likelihood of a devaluation there is some evidence that the likelihood of a devaluation first rises and subsequently declines during the first year of a peg

exchange rate regimes and inflation only hard pegs make a difference abstract using data from a large sample of developing countries from 1985 to 2001 we confirm that hard pegs currency boards or a shared currency reduce inflation and money growth there is no evidence that soft pegs confer any monetary discipline after other factors are controlled for inflation triggers regime switches under hard pegs monetary growth is unaffected by fiscal deficits or by inflation shocks under soft pegs as under floats increased fiscal deficits and positive inflation shocks are associated with higher monetary growth the apparently slower per capita output growth under hard pegs is explained by their geographical distribution jel classification f41

business cycles and the exchange rate system some international evidence this paper investigates the differences in time series behavior of key economic aggregates under alternative exchange rate systems we use a postwar sample of 49 countries to compare the behavior of output consumption trade flows government consumption spending and real exchange rates under alternative exchange rate systems pegged floating and cooperative systems such as the ems we then examine evidence from two particular episodes involving canada and ireland of changes in the exchange rate system aside from greater variability of real exchange rates under flexible than under pegged nominal exchange rate systems we find little evidence of systematic differences in the behavior of macroeconomic aggregates or international trade flows under alternative exchange rate systems these results are of interest because a large class of theoretical models implies that the nominal exchange rate system has important effects on a number of macroeconomic quantities

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 2007 elsevier b v all rights reserved

fixed versus flexible exchange rates which provides more fiscal discipline abstract conventional wisdom holds that fixed rates provide more fiscal discipline than do flexible rates in this paper we show that this wisdom need not hold in a standard model in which fiscal policy is endogenously determined by a maximizing fiscal authority the claim that fixed rates induce more discipline stresses that sustained adoption of lax fiscal policies must eventually lead to an exhaustion of reserves and thus to a politically costly collapse of the peg hence under fixed rates bad behavior today leads to punishment tomorrow under flexible rates bad behavior has costs as well the difference is in the intertemporal distribution of these costs flexible rates allow the effects of unsound fiscal policies to manifest themselves immediately through movements in the exchange rate hence bad behavior today leads to punishment today if fiscal authorities are impatient flexible rates by forcing the costs to be paid up front provide more fiscal discipline and higher welfare for the representative private agent the recent experience of sub saharan countries supplies evidence that matches the predictions of the model

the inverse relationship between productivity and farm size a test using regional data from india the farm size productivity debate for india needs little introduction it has occupied a prominent position in the agricultural economics literature since 1962 when sen observed that indian farm management data revealed an inverse relationship between farm size and yields per acre since then no fewer than twenty journal papers have appeared on this subject sen 1975 the objective of this paper is to test two hypotheses that were either not given enough attention or left unresolved in the debate the first is that the inverse relationship is valid for all of indian agriculture it is not merely a phenomenon observed in a few sample villages this means a test of the hypothesis that the small farm sector as a whole is more productive than the large farm sector in indian agriculture the second hypothesis is that the inverse relationship is true only of a traditional agriculture and that it breaks down with technical progress a methodology is developed below which uses cross sectional regional data to test the two hypotheses simultaneously on applying this methodology to indian district level data 272 districts for 1970 71 it is found that the hypothesis of the small farm sector being more productive than the large farm sector cannot be rejected at low levels of agricultural technology but can be rejected at higher levels this suggests that the inverse relationship between yields and farm size although valid for a traditional agriculture cannot be assumed to exist in an agriculture experiencing technical change

coping with terms of trade shocks pegs versus floats the choice of the exchange rate regime has always been an area of great controversy and debate the discussion has once again taken center stage in the developing world the sequence of currency crises in the 1990 s the success of cultency board arrangements the dollarization plan of ecuador and the apparent swing toward flexible regimes of many emerging economies has revived interest in this debate milton friedman 1953 argued that one of the most important advantages of flexible regimes over fixed regimes is that they can smooth adjustment to real shocks even in the presence of nominal rigidities ever since this has been one of the least disputed benefits attributed to fully flexible exchange rate regimes subsequent to friedman many theories of the international transmission of real shocks have confirmed the original intuition that the shortrun responses to terms of trade shocks should be different across exchange rate regimes here i look at a post bretton woods sample of 74 developing countries to test whether flexible regimes can buffer terms of trade shocks better than fixed regimes

do fixers perform worse than non fixers during global recessions and recoveries there is an important debate about how economies with different exchange rate regimes performed during the great recession and its ensuing recovery while economic theory suggests that economies with fixed exchange rates are more affected and recover more slowly from global shocks than economies with non fixed exchange rates the empirical evidence on the most recent global recession has been mixed this paper examines the exchange rate and economic growth nexus and assesses how this relationship is affected by the four global recessions and recoveries the world economy has experienced post bretton woods while there is no robust long term relationship between exchange rate regimes and growth there is evidence that fixers recover from global recessions at a weaker pace than non fixers

fewer monies better monies in the aftermath of emerging market crises from russia to asia and latin america there is a quest for better monetary arrangements that are more crisis proof fixed rates are out flexible rates are in with a policy focus on inflation targeting but there is of course the alternative of abolishing exchange rates all together this paper revisits the issue of dollarization or currency boards to review what arguments in the debate stand up the case for flexible exchange rates emphasizes the need for a tool to accomplish relative price adjustment this paper argues that in an intertemporal perspective most shocks require financing in the capital market rather than adjustment moreover countries frequently do not use their flexible rate to play a cyclical role and as a result only a pay a premium for the option to depreciate but do not take advantage of the flexibility on the contrary they engineer systematic overvaluation in the context of inflation targeting

oil dependency and exchange rate regimes in arab oil economies time to rethink the paradigm this study examines implications of the current exchange rate regimes on the macroeconomic and growth performance of five arab oil producing countries saudi arabia the uae sudan algeria and yemen the study evaluates alternative exchange rate regime policy options towards exploring an optimal exit strategy to ensure successful transition to more sustainable exchange rate regime especially in the fixed regime economies of saudi arabia and the uae this study proposes the adoption of a transparent broad basket band and crawl bbc regime by the arab oil economies in order to provide a better alternative to the existing fixed pegs or dirty floats however it is imperative to note that the timing of the exit from the current regime and the extent of institutional development and market sophistications are very critical to successful transition to more sustainable regime that would provide a larger scope for counter cyclical policies and diversification in these economies