the classification and performance of alternative exchange rate systems abstract owing to dissatisfaction with the imf s de jure classification of exchange rate regimes a substantial literature has emerged presenting de facto classifications of exchange rate systems and using the latter classifications to compare performances of alternative regimes in terms of key macroeconomic variables this paper critically reviews the literature on de facto regimes in particular the paper 1 describes the main methodologies that have been used to construct de facto codings 2 surveys the empirical literature generated by de facto regime codings and 3 lays out the problems inherent in constructing de facto classifications the empirical literature is found to yield few robust findings we argue that the as yet unfulfilled objective of this literature and the major research agenda for the future in this area lies in the need of a more thorough investigation of the degree of monetary policy independence without relying exclusively on movements in exchange rates an agenda the attainment of which is made especially challenging because of the lack of comprehensive and reliable data on reserves and interest rates

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

estimation of de facto flexibility parameter and basket weights in evolving exchange rate regimes a new technique for estimating countries de facto exchange rate regimes synthesizes two approaches one approach estimates the implicit de facto basket weights in an ols regression of the local currency value rate against major currency values here the hypothesis is a basket peg with little flexibility the second estimates the de facto degree of exchange rate flexibility by observing how exchange market pressure is allowed to show up here the hypothesis is an anchor to the dollar or some other single major currency but with a possibly substantial degree of exchange rate flexibility around that anchor it is important to have available a technique that can cover both dimensions inferring anchor weights and the flexibility parameter we test the synthesis technique on a variety of fixers floaters and basket peggers we find that real world data demand a statistical technique that allows parameters and regimes to shift frequently accordingly we here take the next step in estimation of de facto exchange rate regimes endogenous estimation of parameter breakpoints following bai and perron jel numbers f31 f41

dual exchange rates in europe and latin america this article uncovers some important empirical regularities surrounding the operation of formal dual exchange rates in europe and latin america in the 1970s and 1980s although there are some parallels between the european and latin american experiences there are also interesting differences in terms of the size and nature of the distortion created by two official exchange rates the response of the distortion to foreign interest rates real commercial exchange rates and domestic budget deficits and the motives for adopting this exchange rate regime empirical work on dual exchange rate regimes is made difficult by the transitory nature of these regimes and by frequent changes in institutional practices

does the expectations trap render the natural rate model invalid in the disinflationary zone this chapter raises some questions about the epistemological status of the theory underpinning the original phillips curve formulation and the correspondence between the empirical data and the textbook theoretical representations of the natural rate expectations augmented phillips n reap curve model this is no antiquarian investigation since these curves have dominated applied macroeconomics for over three decades

fiscal deficits output growth and inflation targets in ghana abstract inflation appears to be the macro problem for which no antidote has been found under the economic recovery programme it is possible that either a wrong diagnosis has been made of the problem or that certain factors within the economy are preventing inflation from staying within target levels using an error correction model ecm the paper estimates an inflation equation for ghana the convenience of this model is in the fact that all the data series exhibit an autoregressive scheme of order one that is they are i 1 series in such an instance the granger engle theorem shows that the ecm provides the most efficient model further the ecm unveils some of the short run dynamics which are missing in other estimation techniques the results of the econometric regression show that inflation in ghana either in the long run or short run is influenced more by output volatility than by monetary factors an examination is made of the consistency of fiscal deficit the hypothesis is that an unsustainable fiscal policy would make government miss some macroeconomic targets it is shown that in 1985 and 1989 fiscal policy was consistent inflation was well within target in 1985 for 1986 1988 the government did not maintain consistent fiscal deficits and inflation in those years was well above targets it is recommended that to control inflation in ghana more attention should be paid to supply factors further government should pursue consistent fiscal policies

dual exchange rate systems and capital controls an investigation abstract the welfare aspects of dual exchange rate systems are analyzed in this paper the requirement that domestic financial transactions with the rest of the world be undertaken at a special foreign exchange rate is found to be equivalent to levying a tariff on this class of international transactions hence a dual exchange rate system and capital controls are shown to be essentially identical in light of the above statements the dual exchange rate system should be regarded as a form of commercial policy and be evaluated in this context by applying the applicable standard real trade theorems

monetary economic myth and econometric reality few of the main macro economic forecasting systems can produce sensible forecasts without the tender loving care of their proprietors many econometric equations in com mon use show significant deterioration in the accuracy with which they characterise data as time passes and many economists are sceptical about empirical evidence feeling it lacks credibility monetary relationships have the dubious distinction of being among the leaders in this field as witnessed by the very large mispredictions of m1 models in the usa over what is now known as the missing money period 1973 76 as well as during the recent great velocity decline 1979 82 in the uk models of m1 and m3 demand experienced large structural breaks following the competition and credit control regu lation changes and the move to floating exchange rates perhaps it is no surprise that goodhart s law should have been formulated with respect to money demand equations

seigniorage and the case for national money in countries with high rates of inflation there is typically movement away from the use of the local currency the paper analyzes the costs and benefits of using a local currency with emphasis on the seigniorage foregone by using a foreign money even if it should be desirable for a country to fix its exchange rate it still loses seigniorage if it does not use its own money the case for using a foreign money then turns largely on the superior discipline imposed on domestic policymakers by removing their control over the money supply alternative methods of imposing discipline are discussed estimates of the amount of seigniorage raised by different governments are presented seigniorage amounts in some cases to about 10 percent of government revenue estimates are also presented of both the annual flow and one time stock costs of giving up use of domestic currencies and instead using the dollar the flow cost is typically about 1 percent of gnp and the stock cost is around 10 percent of gnp

exchange rate differential and balance of payments under dual exchange markets abstract this paper develops a model of an economy that uses two exchange markets an official market in which the exchange rate is determined by central bank intervention and a free market in which the exchange rate is determined by market forces the official market handles selected imports and exports while the free market handles the remaining imports and exports and capital transactions the model is used to discuss the effects of various policies on the differential between the free and the official exchange rates and on the balance of payments

does monetary integration reduce exchange rate pass through there are several theoretical arguments for why the adoption of a common currency either a currency union or a currency board may reduce the exchange rate pass through erpt to domestic consumer prices this paper examines a broad panel of 101 countries over the period 1976 2006 using two stage instrumental variable estimation techniques in order to resolve the potential endogeneity problem the main result is that erpt indeed tends to decline in countries participating in a common currency arrangement in particular there has been a strong reduction in pass through in the member countries of the european monetary union emu since the launch of the euro currency boards do not appear to be different from currency unions both reduce the pass through from depreciation to inflation furthermore the negative impact of common currencies on erpt is at work in both high income and low income countries finally most of the reduction in pass through to consumer prices under common currency arrangements happens somewhere along the pricing chain between the border and the supermarket shelf

crisis sustainability of electricity prices and state interventions in argentina this article examines the sustainability of wholesale power prices following the 2001 economic crisis in argentina we depart from the contractual disputes between the multinational power generating companies and the state of argentina arising from price and investment interventions after the economic crisis then we move on to argue that these sector specific measures were inevitable once some of the key macroeconomic policies such as the currency board system were discarded using an error correction method and estimating a counterfactual price series we demonstrate that in the absence of changes in the price determination method and direct public investment the level and the volatility of power prices would have been much higher with further knock on effects on the rest of the economy copyright 2012 the author 2011 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

does the exchange rate regime make a difference in inflation performance in developing and emerging countries the role of inflation targeting abstract we apply propensity score matching estimators with multiple outcomes to evaluate the impacts of exchange rate regimes fixed intermediate and flexible without inflation targeting and inflation targeting on inflation rates in emerging and developing countries an inflation targeting regime does better than or at least as good work as a fixed regime in lowering inflation rates when compared with intermediate or flexible regimes we do not observe a clear difference in inflation rates between fixed and inflation targeting regimes in recent years 2000 2007 intermediate and flexible regimes provide higher inflation than fixed or inflation targeting regimes in most cases

fixed exchange rates as a means to price stability what have we learned abstract the paper discusses what we have learned from last year s currency crises in erm and the nordic countries about fixed exchange rates as a means to achieve price stability after discussing the explanations for the crises the paper concludes that fixed exchange rates are not a shortcut to price stability monetary stability and credibility have to be built at home and cannot easily be imported from abroad fixed exchange rates are more fragile and difficult to maintain than previously thought they may even be in conflict with price stability by inducing a procyclical destabilizing monetary policy and by inducing an inflation bias building monetary credibility is even more important with flexible exchange rates

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

special exchange rates for capital account transactions the governments of developing countries are constrained in the effective implementation of domestic policy by the interlinkages of national and international financial markets domestic macroeconomic conditions are influenced by the interaction of national and world interest rates and prices and through the impact of real exchange rates on employment the domestic responses to changes in these factors are often strong and rapid this article suggests that dual rates can indeed be used successfully as a strictly transitory policy to offset sudden shocks in capital markets the article develops models which indicate why these dual systems are able to prevent inflationary or recessionary pressures caused by a misaligned exchange rate in the short term while free capital account rates can cut the flow of capital flight however a dual rate system cannot prevent a possibly equivalent loss of foreign reserves that will ultimately result because of the impact of the overvaluation of the commercial rate on the trade balance in the longer term a dual rate system with a misaligned commercial rate exacerbates the government s deficit ultimately real wages must be cut and real interest rates raised to generate sufficient foreign exchange to finance the external debt thus a dual rate works well if the commercial rate is maintained close to the equilibrium level

the transmission of disturbances under alternative exchange rate regimes with optimal indexing the paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange rate systems uniform flexible exchange rates uniform fixed exchange rates and two versions of two tier exchange rates the analysis makes two general points first one cannot assume stability of structure when assessing the consequences of alternative exchange rate regimes for example the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government s choice of exchange rate regime second exchange rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare

evaluation of currency regimes the unique role of sudden stops this paper tackles two established puzzles in international macroeconomics literature the first is the lack of systematic differences in the macroeconomic performance across exchange rate regimes the second is the absence of a clear empirical relationship between macroeconomic performance and capital account liberalization we suggest that these negative findings may be due to empirical methods that fail to account for a latent economic crisis state influenced by exchange rate and capital account regimes and to allow that latent variable to influence the growth effects of policy regimes in practice we model and estimate the latent state of the economy as a crisis probability our proposed framework of analysis allows exchange rate and capital market liberalization regimes to have both a direct effect on short term growth and an indirect effect on growth that is channelled through their effects on the crisis probability the empirical decomposition of the total effect into two conflicting effects helps resolve the puzzles assaf razin and yona rubinstein

the economic determinants of the choice of an exchange rate regime a probit analysis abstract probit models were used to analyze the choice of exchange rate regimes by developing countries in the period 1977 1995 the results show the preeminence of criteria postulated in the theory of optimum currency areas i e individual structural characteristics

the aftermath of a currency collapse how different are emerging markets in currency crises unlike in orderly devaluations the financial markets dominate events previous research has shown that the output effects of a crisis tend to be worse in emerging markets and the current account adjustment greater this paper examines the evolution of a wider range of macroeconomic variables from two years before a currency collapse to two years afterwards on the basis of twelve recent episodes it is shown that currency collapses crises followed by depreciations have had a much greater adverse impact in emerging markets defined as relatively high income developing countries exposed to international capital markets than in developed countries there is greater nominal and real depreciation a substantial inflation shock a much bigger output effect and far greater import compression whilst inflows of portfolio capital virtually cease these differences are statistically significant nevertheless there is wide variation n the post collapse experience of the six emerging markets studied mexico thailand korea indonesia russia and brazil although all six experienced a sudden stop or even a reversal of capital flows and very sharp nominal depreciations inflation remained low in thailand korea and brazil and output losses were comparatively small in russia and brazil previous studies of individual crises suggest that important factors are the state of the banking system and its vulnerability to currency movements the ability of the authorities to establish a credible macroeconomic policy after the collapse and whether the crisis triggers significant political instability

fiscal policies and the choice of exchange rate regime a common argument against either a monetary union or a regime or a fixed exchange rates is that they preclude flexible use of the inflation tax the authors address this point of view by comparing three alternative exchange rate regimes a pure float an ems regime in which the exchange rate is fixed but can be realigned and a monetary union the authors model the three regimes as alternative commitments on future seigniorage policies this approac h suggests that it is not possible to pareto rank the three regimes o n the other hand the authors provide intuitive conditions under which each of the systems is superior to the others copyright 1993 by royal economic society

currency boards more than a quick fix currency boards more than a quick fix once a popular colonial monetary arrangement currency boards fell into disuse as countries gained political independence but recently currency boards have made a remarkable come back this essay takes a critical look at their performance are currency boards really a panacea for achieving low inflation and high growth or do they merely provide a quick fix allowing authorities to neglect fundamental reforms and thus fail to yield lasting benefits we have three major findings first the historical track record of currency boards is sterling with few instances of speculative attacks and virtually no involuntary exits countries that did exit from currency boards did so mainly for political rather than economic reasons and such exits were usually uneventful second modern currency boards have often been instituted to gain credibility following a period of high or hyperinflation and in this regard have been remarkably successful countries with currency boards experienced lower inflation and higher if more volatile gdp growth compared to both floating regimes and simple pegs the inflation difference reflects both a lower growth rate of money supply a discipline effect and a faster growth of money demand a credibility effect the gdp growth effect is significant but may simply reflect a rebound from depressed levels third case studies reveal the successful introduction of a currency board to be far from trivial requiring lengthy legal and institutional changes as well as a broad economic and social consensus for the implied commitment moreover there are thorny issues as yet untested regarding possible exits from a currency board thus currency boards do not provide easy solutions but if introduced in the right circumstances with some built in flexibility they can be an important tool for gaining credibility and achieving macroeconomic stabilization atish r ghosh anne marie and holger c wolf

the effects of tax increases on negotiated wage increases in the canadian private sector the major objective of this study is to estimate the short run inflationary supply side effects of increases in sales tax rates and income tax rates on canadian negotiated wage rates empirical results are based on an econometric analysis of 867 cola wage contracts and 1662 non cola wage contracts signed during the 1979 to 1992 period in the canadian private sector no statistical evidence is found to show that the substantial increases in the average rate of income tax in canada during this period led to larger negotiated wage increases on the other hand it is found that union workers were able to negotiate wage increases to offset part of the increase in consumer prices attributable to increases in sales tax rates given a 1 increase in the cpi directly attributable to sales tax increases non cola contracts provided a 0 25 wage increase and cola contracts provided a 0 75 wage increase the 6 4 increase in the canadian consumer price index directly attributable to sales tax increases during the

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

determinants of the spread in a two tier foreign exchange market abstract the determinants of the spread between the commercial and financial exchange rates are analyzed in a two tier exchange market model derived from utility maximization contrary to popular belief it is found that domestic policy and non policy variables have no effect on the spread only foreign factors matter