De Facto Exchange Rate Regime Classifications: An Evaluation

Abstract

There exist several statistically-based exchange rate regime classifications that disagree with one another to a disappointing degree. To what extent is this a matter of the quality of the design of these schemes, and to what extent does it reflect the need to supplement statistics with other information (as is done in the IMF's de facto classification)? It is shown that statistical methods are good at the basics (distinguishing some type of peg from some type of float), but less helpful in other respects, such as determining whether a float is managed, particularly for countries that are not very remote from their main trading partners. Different measures of exchange rate volatility have been used but are not primarily responsible for differences between classifications. The theoretical underpinning of particular classification schemes needs to be more explicit.

Determinants of De Jure – De Facto Exchange Rate Regime Gaps

“…Even more extensive approach was developed by Levy-Yeyati and Sturzenegger (2005), which classified de facto ERRs based on the exchange rate' changes, the volatility of these changes and the volatility of reserves, while also discussing the emergence of ERR gaps between different types of regimes. Another onset on the IMF classification 5 was successfully (in terms of its later adoption) performed by Reinhart and Rogoff (2004) 6 with their analysis focusing not only on movements of the official ERs but also on the presence of dual or black-market foreign exchange arrangements, convertibility restrictions and countries' monetary policy actions influencing the actual ERR. Shortly afterwards the IMF developed its own de facto classification which, nevertheless, was strongly tied to their de jure classification and subjected to a portion of criticism for its less comprehensive methodology 7 .…”

“…Nevertheless, only limited attempts were made to ascertain both roots and outcomes of the ERR gaps. The importance of sticking to commitments was tested by Bearce (2008) and Guisinger and 5 Which is stated to be "only a little better than random" (Reinhart and Rogoff, 2004). 6 The update of this classification (in terms of both the data and the methodology) was conducted by Ilzetzki, Reinhart and Rogoff (IRR) in 2019.…”

Exchange Rate Determination: Mixed Microstructural and Macroeconomic Approach

“…This Journal is licensed under a Creative Commons Attribution 4.0 International License interest rate intervenes in the comparison of the de jure and de facto classification alongside nation' currencies (Reinhart and Rogoff, 2004). Unfortunately, the regime classification depends on other macro-economic factors and in risk reigned from volatilities and political decisions (Levy- Yeyati and Sturzenegger, 2005;; (Bleaney et al, 2016).…”

Do fixers perform worse than non-fixers during global recessions and recoveries?

“…For the annual measure of exchange rate flexibility, the Japanese Yen and British pound are also considered numeraire currencies. However, results are robust to the choice of the numeraire currency.18 See, for instance,Klein and Shambaugh (2010), Rose (2011), Eichengreen and Razo-Garcia (2011), andBleaney et al (2017b). Because of these problems, caution must be exercised when examining the link between exchange rate regimes and financial development, financial openness, among others(Eichengreen and Razo-Garcia, 2011).…”