Exchange Rate Management and Crisis Susceptibility: A Reassessment

Abstract

This paper revisits the bipolar prescription for exchange rate regime choice and asks two questions: are the poles of hard pegs and pure floats still safer than the middle? And where to draw the line between safe floats and risky intermediate regimes? Our findings, based on a sample of 50 EMEs over 1980-2011, show that macroeconomic and financial vulnerabilities are significantly greater under less flexible intermediate regimes-including hard pegs-as compared to floats. While not especially susceptible to banking or currency crises, hard pegs are significantly more prone to growth collapses, suggesting that the security of the hard end of the prescription is largely illusory. Intermediate regimes as a class are the most susceptible to crises, but "managed floats"-a subclass within such regimes-behave much more like pure floats, with significantly lower risks and fewer crises. "Managed floating," however, is a nebulous concept; a characterization of more crisis prone regimes suggests no simple dividing line between safe floats and risky intermediate regimes. JEL Classification Numbers: F31, F33

The real exchange rate and economic growth: Revisiting the case using external instruments

“…Exchange rates and the choice of the exchange rate regime retain a centre stage in the postcrisis environment especially for emerging economies (Klein and Shambaugh 2010; Rose 2011; Ghosh et al 2014). In particular, there is a signi…cant divide between policy-makers and economists regarding the impact of foreign exchange policies on growth.…”

Resetting the International Monetary (Non)System

“…Most European countries moved into a currency union, whereas most developing countries, but also some developed countries (including the earlier champion of flexibility, Canada), ended up in some form of managed floating. Indeed, according to an alternative classification of exchange rate regimes offered by Ghosh et al (2015), the popularity of greater flexibility increased among emerging and developing countries in the 1990s only to give way to more managed flexibility after the crises they experienced in the late twentieth century (see Figure 3.5). Interventions in foreign exchange markets responded to the basic indictment of Williamson that 'the exchange rate is too important to be treated as a residual ' (1983a: 59).…”

“…This decision would also ignore the fact that exchange rates have many other macroeconomic dimensions, which is essentially why they should be under IMF jurisdiction. 100% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: Author estimates based on data from Ghosh et al (2015). Income categories according to World Bank, using income levels of 2000.…”

“…Indeed, hard pegs may be sustainable, but generate major recession risks, as strikingly shown by the experience of the Baltic countries and the eurozone periphery during and after the North Atlantic financial crisis. And although some intermediate regimes, particularly those with insufficient flexibility, are associated with higher risk of crises, other intermediate regimes, which Ghosh et al (2015) refer to as 'managed floats', do reduce the risk of crises and are 7 Using United Nations data, real exports reached two periods of fast growth after the Second World War: 1950-74, when they grew at 7.4 per cent a year, and 1986-2007, when they grew at a rate of 7.3 per cent. However, the elasticity to world gross domestic product at market exchange rates was much higher in the latter than in the former period: 2.39 versus 1.55. compatible with a large element of monetary policy autonomy (see also Fischer 2008;Frankel 2004).…”

China's Domestic Transformation in a Global Context

“…Following Edwards (2009), Ghosh et al (2014) and others, we specify the following benchmark variance component panel probit model (Equations 10.1 and 10.2). In Equations 10.1 and 10.2, Crisis it is a dummy variable that takes the value of one if country i in period t experiences a financial crisis (banking, currency or debt crisis), and zero otherwise.…”