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Rogoff et al - Evolution and Performance of Exchange Rate Regimes

Rogoff et al - Evolution and Performance of Exchange Rate Regimes

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WP/03/243 Evolution and Performance of Exchange Rate Regimes Kenneth S. Rogoff, Aasim M. Husain, Ashoka Mody, Robin Brooks, and Nienke Oomes
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© 2003 International Monetary Fund WP/03/243 IMF Working Paper Research Department Evolution and Performance of Exchange Rate Regimes 1 Prepared by Kenneth S. Rogoff, Aasim M. 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. 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. 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. Rather, intermediate regimes have shown remarkable durability. The analysis suggests that as economies mature, the value of exchange rate flexibility rises. For countries at a relatively early stage of financial development and integration, fixed or relatively rigid regimes appear to offer some anti-inflation credibility gain without compromising growth objectives. As countries develop economically and institutionally, there appear to be considerable benefits to more flexible regimes. For developed countries that are not in a currency union, relatively flexible exchange rate regimes appear to offer higher growth without any cost in credibility. JEL Classification Numbers: F4, F33, E3 Keywords: Exchange rate regimes, economic performance Authors’ E-Mail Addresses: [email protected] ; [email protected] ; [email protected] ; [email protected] ; [email protected] 1 This paper was prepared while Ken Rogoff was Economic Counselor and Director of the IMF’s Research Department. The authors would like to acknowledge contributions from Andrew Berg (Section III.E), Paolo Mauro and Grace Juhn (Appendix II), and Antonio Spilimbergo (Section III.C). They are indebted to Rex Ghosh for providing his dataset, and to Young Kim and Eisuke Okada for valuable research assistance. For many helpful comments on earlier drafts, we would like to thank, without implicating, Tam Bayoumi, Michael Bordo, Agustín Carstens, Barry Eichengreen, Inci Otker-Robe, Jacques Polak, Carmen Reinhart, David Robinson, Miguel Savastano, Federico Sturzenegger, and Lars Svensson.
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- 2 - Contents Page I. Overview ...................................................................................................................... 4 II. The Evolution of Exchange Rate Regimes: A Fresh Look .......................................... 7 A. New Regime Classifications ................................................................................. 8 B. Divergence Between Stated and Actual Policies ................................................ 11 C. Regime Transitions ............................................................................................. 20 D. Implications for Assessing Regime Performance ............................................... 24 III. Regime Performance: Inflation and Business Cycles ................................................ 25 A. Introduction and Motivation ............................................................................... 26 B. Analytical Considerations ................................................................................... 28 C. Macroeconomic Performance and Crisis Probabilities: Summary Statistics ...... 31 D. Regime Performance and Levels of Development ............................................. 38 E.
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