To Peg or Not to Peg: A Template for Assessing the Nobler

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper proposes a template for assessing whether or not a country's economic and financial characteristics make it an appropriate candidate for a pegged exchange rate regime. The template employs quantifiable measures of attributes-trade orientation, financial integration, economic diversification, macroeconomic stabilization, credibility, and "fear-offloating" type effects-that have been identified in the literature as key potential determinants of regime choice. To illustrate, the template is applied to Kazakhstan and Pakistan. The results indicate a fairly strong case against a pegged regime in Pakistan. The implications for Kazakhstan are mixed, although changes in that economy in recent years strengthen the case against a peg.

IMF Exchange Rate Policy Advice

“…26 The IMF, for its part, has been late to develop such approaches. However, though very different in terms of methodologies, recent work by Husain (2006)-first applied in the context of Morocco, and later used for countries such as the former Yugoslav Republic of Macedonia, Serbia, and Ukraine-and Schadler and others may have overemphasized the benefits of a rapid move to more flexible exchange rate regimes, while insufficiently appreciating country-specific obstacles to implementation and other reasons why country authorities may prefer to remain-or remain longer-with a more managed exchange rate system. 33.…”

Less Focus on the Dollar, More Focus on the Ruble: Currency Management Strategy in Kazakhstan, Post Devaluation

“…As Juhn and Mauro [4] and Rogoff et al [5] point out, some factors may suggest a fixed rate is preferable while others support the use of flexible rates, views that fit what is known as the Corner Hypothesis. As Husain [3] noted, no single factor consistently explains actual regime choice. Edwards and Savastrano [6] and Husain, Moody and Rogoff [7] examine the issue of regime choice, performance and the subsequent durability of alternative regimes.…”

“…This regime held until December 2004 when a fixed parity peg was implemented. In January 2006 NBK introduced the relaxed policy referred to by Husain [3] with a degree of flexibility that exceeds that typified by a narrow band. This 6 month episode could be classified as either a wide band or managed float.…”

Assessing Competitiveness and Real Exchange Rate Misalignment in Low-Income Countries

“…Because the indicators are measured in different units of account, any comparison between two countries on two (or more) different indicators is difficult. To solve this problem, following Husain (2006), the template orders the countries in percentiles. Percentiles (deciles in the template) are straightforward to compute; the higher the order of the percentile that is used, the easier to differentiate the situation of any two countries for a given indicator, but at the same time, the larger (and thus less tractable) will be number of different percentile groupings.…”