Larrain, Felipe and Parro, Francisco (2006): Do Exchange Rate Regimes Matter? Evidence for Developing Countries.
Download (262Kb) | Preview
Most countries which have experienced exchange rate crises over the last two decades have been under soft pegs or crawls. These exchange rate arrangements have normally succumbed in the face of massive capital inflow reversals --especially in developing countries-- thus provoking a search for options. Hard pegs and floating regimes seem to be the only viable options. This paper carries through an empirical analysis with panel data to study the relationship between the option of exchange rate regime and macroeconomic performance in developing countries. We use an extended and updated database to study the evidence for 154 countries over the period 1974-2004. Performance is measured by per capita GDP growth and its volatility. Our results show that floating rates tend to present higher levels of growth and lower levels of volatility in relation to other exchange rate arrangements. Intermediate regimes (soft and crawling pegs), on the other hand, score at the bottom of the growth rankings, while hard pegs appear to induce the largest growth volatility. In light of these results, it should not come as a surprise that the world is not moving to a single global currency, as some have predicted. The world is moving to fewer currencies, but at an extremely slow pace. Yet, floating rates will probably remain the most popular form of exchange rate regime over the next half century. This paper provides some basis for that popularity.
|Item Type:||MPRA Paper|
|Original Title:||Do Exchange Rate Regimes Matter? Evidence for Developing Countries|
|Keywords:||exchange rate regimes, hard pegs, developing countries, growth regressions, volatility|
|Subjects:||C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C23 - Models with Panel Data; Longitudinal Data; Spatial Time Series
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Francisco Parro|
|Date Deposited:||17. Feb 2012 15:19|
|Last Modified:||14. Feb 2013 10:54|
Calvo, G. and Mishkin, S. (2003). ´The mirage of exchange rate regimes for emerging market countries´, National Bureau of Economic Research working paper No. 9808, Cambridge, MA: NBER, www.nber.org.
Cooper, R. (1984), “A Monetary System for the Future”, Foreign Affairs, Fall.
Edwards, S. and Levi-Yeyati, E. (2003). ´Flexible exchange rates as shock absorbers´, National Bureau of Economic Research working paper No. 9867, Cambridge, MA: NBER, www.nber.org.
International Monetary Fund (2002). ´The evolution of the exchange rate regimes since 1990: evidence from de facto policies´, IMF working paper No. 02/155, Washington, DC: IMF, www.imf.org.
International Monetary Fund (2004). ´Classification of exchange rate arrangements and monetary policy frameworks´, Washington, DC: IMF, www.imf.org.
Frankel, J., Schmukler, S. and Servén, L. (2000). ´Verificability and the vanishing intermediate exchange rate regime´, National Bureau of Economic Research working paper No. 7901, Cambridge, MA: NBER, www.nber.org.
Friedman, M. (1953). ´The case for flexible exchange rates´, in Essays in Positive Economics, Chicago: University of Chicago Press.
Ghosh, A., Gulde, A., Ostry, J. and Wolf, H. (1997). ´¿Does the nominal exchange rate regime matter?´, National Bureau of Economic Research working paper No. 5874, Cambridge, MA: NBER, www.nber.org
Hausmann, R. (1999), “Should there be five currencies or one hundred and five?”, Foreign Policy, Fall.
Hausmann, R., Gavin, M., Pagés-Serra, C. and Stein, E. (1999). ´Financial turmoil and the choice of exchange rate regime´, IADB working paper N° 400, Washington, DC: Inter-American Development Bank, www.iadb.org.
Heckman, J. and Pagés, C. (2000). ´The cost of job security regulation: evidence from Latin American labor markets´, National Bureau of Economic Research working paper No. 7773, Cambridge, MA: NBER, www.nber.org.
Husain, A., Mody, A. and Rogoff, K. (2004). ´Exchange rate regime durability and performance in developing versus advanced economies´, Journal of Monetary Economics, 52, pp 35-64.
Krugman, P. (1979). ´A model of balance of payments crises´, Journal of Money, Credit and Banking, 11, pp. 311-25.
Larraín, F. and J. Sachs (1999), “Why dollarization is more straitjacket than salvation?”, Foreign Policy, Fall.
Larraín, F., and Velasco, A. (2001). ´Exchange rate policy in emerging market economies: the case for floating´, Essays in International Economics, 224, Princeton University, December.
Larraín, F., and Velasco, A. (2002). ´How should emerging economies float their currencies?´, The Economics of Transition, 10, pp. 365-92.
Larraín, F. (2005). ´Flotar o dolarizar: ¿Qué nos dice la evidencia?´, El Trimestre Económico, vol. LXXII (1), january-march 2005, pp. 5-28.
Levy-Yeyati, E., and Sturzenegger F. (2003). ´To float or to fix: evidence on the impact of exchange rate regimes´, American Economic Review, 93, pp.1173-93.
Levy-Yeyati, E., and Sturzenegger, F.(2005). ´Classifying exchange rate regimes: deeds vs. words´, European Economic Review, forthcoming.
Obsfeld, M. (1997). ´Destabilizing effects of exchange rate escape clauses´, Journal of International Economics, 43, pp. 61-77.
Reinhart, C. and Rogoff, K. (2002). ´The modern history of exchange rate: a reinterpretation´, The Quarterly Journal of Economics, 119, pp. 1-48.
Tornell, A., and Velasco, A. (2000). ´Fixed versus flexible exchange rates: which provides more fiscal discipline?´, Journal of Monetary Economics, 45, pp 399-436. World Bank (2004). World Development Indicators, Washington, DC: The World Bank, http://sima-ext.worldbank.org/query/.