In spite of the fact that the evolution of exchange rate arrangements and the association between exchange rate regimes and economic performance looks very. In other words, we try to find the economic and political factors underlying the choice of exchange rate regimes. An exchange rate regime is the way a monetary authority of a country or currency union manages the currency in relation to other currencies and the foreign exchange market. Pdf the impact of exchange rate regimes on economic growth. It then uses the natural classification to document the main features of regime evolution and durability across countries, differentiating between groups of countries. Rather, intermediate regimes have shown remarkable durability. Pdf evolution and performance of exchange rate regimes. Empirical regularities concerning the variation over time of real and monetary disturbances and crosscountry inflation differentials are first discussed. Section 3 outlines a new keynesian small open economy model, performs quantitative analyses, and. It is important to understand terms such as foreign exchange and exchange rate as they are central to understanding the economy around you. Shambaugh dartmouth college november 20th, 2006 abstract. Pdf using recent advances in the classification of exchange rate regimes, this paper finds no support for the popular bipolar view that countries will. This section describes the evolution of ex chan ge rate regimes across t he world usi ng. Performance in developing countries versus advanced economies.
A study conducted by the international monetary fund 1984 lists four criteria for evaluating an exchange rate regime with respect to its effect on the economy. Since the breakdown of the bretton woods system in the early 1970s, countries have adopted a wide variety of regimes, ranging from pure. Issues relating to the evolution of exchange rate regimes are examined. The results indicated that as compared to flexible exchange regime, growth rate was higher by 1. With the outbreak of the two world wars in 1914 and 1939, stable exchange rate regimes had gone completely haywire. Foreign exchange rate policies whether to adopt a fixed or flexible exchange rate regime have long been at the heart of policy debates among academic researchers and policymakers. What is exchangerate regime the way an authority manages its currency in relation to other currencies and the foreign exchange market an exchange rate change is simply the price of one currency in terms of another 3. A flexible exchange rate regime lets the forces of supply and demand determine currency values. For example, denmark has fixed its exchange rate against the euro, keeping it very close to 7. Use the free adobe acrobat reader to view this pdf file.
For example, the market exchange rate may be 5 5 zlotys to the u. The shift has been from a nominal fix to oneway nominal movement over the nineties to twoway with low volatility implying a tightly managed exchange. The issue of the appropriate exchange rate regime for individual countries has been perennially lively, and the role played by international capital flows and domestic financial systems in determining the performance of these regimes has gained prominence in the policy debate. This paper analyses the choice of exchange regimes of 17 economies in the mena region for the period 19902000.
The evolution and impact of asian exchange rate regimes. When making an exchangerate forecast based on the monetary model, the analyst must consider the effect of all the fundamentals simultaneously. Exchange rate regime and exchange rate performance. Macroeconomic performance and exchange rate regimes. We use random effect ordered probit model in order to find the long run economic and political determinants of exchange rate regimes for emerging economies. It is the aim of this paper to investigate, using chow test analytical procedure to determine the performance of the economy under the fixed and flexible exchange rate regimes in nigeria for the sample period 1970 to 2011. Few topics in international economics are as controversial as the choice of an exchange rate regime. Exchange rate regimes in the modern era meet the berkeley. Choice of exchange rate regimes for developing countries english abstract. The choice of an appropriate exchange rate regime for developing countries has been at the center of the debate in international finance for a long time. It is often hard to figure out what the exchange rate regime of a country is in. This paper analyzes the influence of exchange rate regimes on fiscal performance, focusing on the difference between fixed and flexible exchange rates.
Introduction there has been considerable evolution in indias exchange rate regime over the reform years1. Klein fletcher school, tufts university and nber and jay c. Russian central bank abandons rouble trading band, floats rouble. Evolution and performance of exchange rate regimes. Although this system worked relatively well while the u.
Using recent advances in the classification of exchange rate regimes, this paper finds no support for the popular bipolar view that countries will tend over time to move to the polar extremes of free float or rigid peg. Moreover, due to global financial crisis the latter. Does the exchange rate regime affect macroeconomic. Impact of exchange rate regimes on economic growth abstract it has been a challenge to identify a direct correlation between exchange rate regimes and economic growth. Using recent advances in the classification of exchange rate regimes to draw new lessons about the performance of alternative regimes, this papers key message is that. Evolution and performance of exchange rate regimes imf occasional paper. The next section discusses our empirical framework and establishes evidence on the. Choice of exchange rate regimes for developing countries april 2001 africa region working paper series no. Official pdf, 36 pages world bank documents world bank group. The impermanence of fixed exchange rates has become a stylized fact in international. An empirical analysis of the exchange rate regime in the. Exchange rate regimes in developing and emerging asia. Evolution and performance of exchange rates regimes. Some simple statistical analysis suggests little difference in the behaviour of the real exchange rate between the fixed and floating exchange rate period and, importantly, the mean, range and variance of the real exchange rate prior to and since.
Exchange rate regime analysis using structural change. Debates on the appropriate exchange rate regime for a country are perennially lively. The exchange rate regimes between the fixed ones and the floating ones. A nation essentially has three options for exchange rate regimes. There is only a tiny variation around the fixed exchange rate against another currency, well within plus or minus 2%.
The exchange rate is sometimes called the most important price in a highly globalized world. An analysis of the operation and consequences of exchange rate regimes in an era of increasing international interdependence. Thus, the empirical results reveal some relevant arguments that support the fix exchange regime. In their discussions of papers on exchange rate regimes in september and november 1999, imf executive directors concluded that there were no simple prescriptions for the choice of a countrys ex change rate regime. The choice and management of an exchange rate regime is a critical aspect of economic management to safeguard competitiveness, macroeconomic stability, and sustainable development. The determinants of exchange rate regimes in emerging market. Pdf the impact of exchange rate regimes on economic. Exchange rate regimes and economic performance request pdf. Exchange rate regimes exchange rate regime refers to the way the value of the domestic currency in term of foreign currencies is determined. Evolution of indias exchange rate regime ashima goyal i. Pdf the international community has experimented with many exchange rate.
From different angles and aspects, this thesis contributes to the related literature, and provides fresh theoretical arguments and comprehensive study on the exchange rate regime and exchange rate performance in east asia. It is also relevant to discuss the minimum re quirements for any theoretical model of exchange rate determination to be consistent with these empirical regularities. The remainder of the paper is organized as follows. Choice of exchange rate regimes for developing countries. Second, the number and structure of exchange rate regimes for the indian rupee inr since april 1993 is analyzed. If the markets expectation of the future exchange rate were to change, the current exchange rate would move in the same direction. As the figure titled fixed exchange rate regime illustrates, the true market exchange rate is at e m but the polish government wishes to peg the currency at the lower exchange rate e p. The performance of exchange rate regimes in developing countries does the classification scheme matter.
Macroeconomic performance under various exchange rate regimes depends on macroeconomic policy as well as external effects. Using recent advances in the classification of exchange rate regimes, the key message in this paper is that, as. One of the most important issues left unanswered in international finance is the debates over which type of exchange rate can best stimulate economic growth. The focus is on how the real exchange rate has been affected by the changing exchange rate regimes.
Evolution and performance of exchange rate regimes 1 prepared by kenneth s. The study includes 25 emerging market economies over the period 19702006. It is closely related to monetary policy and the two are generally dependent on many of the same factors, such as economic scale and openness, inflation rate, elasticity of the labor market, financial market development. The paper then develops a model that incorporates these regularities and thereby enables exchange rate regime changes to be viewed as optimal and. Annual report on exchange arrangements and exchange restrictions 2014. The choice of exchange rate regimes in the mena countries. The shift has been from a nominal fix to oneway nominal movement over the nineties to twoway with low volatility implying a. A fixed exchange rate regime pegs the value of the domestic currency to another currency. This paper considers the choices and tradeoffs an economy faces when deciding on its combination of exchange rate, monetary policy and capital account policies. Evolution of the exchange rate regime founded in may 1964, the brb has maintained the exchange rate regime set up by the belgian trusteeship until february 1965. This new set of evidence on the economic impact of the exchange rate regime calls for a reexamination of the common impression, based on earlier research, that exchange rate regimes are irrelevant. Exchange rate regimes in the modern era the mit press. Classification of exchange rate regimes imf exchange rate classification beyond the level of disaggregation of regimes is the system by which they are classified.
Exchange rate movements and economic performance in republic of macedonia. Exchange rate regimes and economic performance 63 exchange rate regime is better suited to deal with increasingly global and unstable world capital markets. What are the costs and benefits of various exchange rate regimes. Evolution and performance of exchange rate regimeskenneth s. The nature of exchange rate regimes dartmouth college.
It can adopt a floating, fixed, or crawling peg exchange rate regime. Quantitative analysis of the impact of exchange rate. First official parity rate of bif with the belgian franc applied to the operations of a particular. The choice and design of exchange rate regimes mar gudmundsson introduction this paper discusses the design and management of exchange rate regimes in africa. In the 1990s, a new set of considerations came to the fore, particularly the role played by international capital flows and domestic financial systems in determining the performance of exchange rate regimes.
A countrys choice of its exchange rate regime, between governmentmanaged fixed rates and marketdetermined floating rates has significant implications for monetary policy. The bretton woods system was established in 1944 and lasted for around two decades. It is 1 foreign exchange rate1 1 contributors to this series are. The exchange rate is the price of one currency in terms of another currency, that is, the current market price for which one national currency can be exchanged for another. Husain, ashoka mody, robin brooks, and nienke oomes authorized for distribution by raghuram rajan december 2003 abstract this working paper should not be reported as representing views of the imf. Flamur bunjaku university of pristina abstract exchange rate regimes and the monetary policy are the key instruments governments use to achieve their economic and financial objectives.