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Fear of Declaring: Do Markets Care What Countries Say About Their Exchange Rate Policies?

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Author Info

  • Adolfo Barajas
  • Lennart Erickson
  • Roberto Steiner

Abstract

Beginning with the papers by Calvo and Reinhart (2002) and Levy Yeyati and Sturzenegger (2001), there has been growing recognition of a disconnect between what emerging economies say they do in exchange rate policy (words), and what they do in practice (deeds). More specifically, a “fear of floating” behavior has been identified, whereby countries that classify themselves as floating exchange rate regimes intervene quite vigorously over time. While many persuasive arguments have been offered as to why countries intervene, the question remains as to why intervening countries continue to classify their regimes as floating. Thus, concurrently with fear of floating, there seems to be a “fear of declaring.” This paper examines one possible reason for fear of declaring: that international capital markets might reward countries that are classified toward the flexible end of the spectrum. Based on the JPMorgan Emerging Market Bond Index spread, we use a panel data approach that exploits both time and cross-country variability. With some qualifications, we find that spreads are lower in countries that have a fixed exchange rate regime, whether de jure or de facto, implying that there is no evidence that markets punish fear of floating. One possible explanation for this puzzle—that is, countries intervene but say that they do not, even though markets appear to be, at a minimum, indifferent to intervention—arises from the fact that there is evidence that de jure floating regimes may fare better in crisis situations. IMF Staff Papers (2008) 55, 445–480. doi:10.1057/imfsp.2008.14

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 55 (2008)
Issue (Month): 3 (July)
Pages: 445-480

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Handle: RePEc:pal:imfstp:v:55:y:2008:i:3:p:445-480

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Cited by:
  1. Bersch, Julia & Klüh, Ulrich H., 2007. "When countries do not do what they say: Systematic discrepancies between exchange rate regime announcements and de facto policies," Discussion Papers in Economics 2072, University of Munich, Department of Economics.
  2. Adolfo Barajas & Roberto Steiner & Leonardo Villar & Cesar Pabon, 2014. "Inflation Targeting in Latin America," Research Department Publications IDB-WP-473, Inter-American Development Bank, Research Department.
  3. S. Rajan, Ramkishen, 2010. "The Evolution and Impact of Asian Exchange Rate Regimes," ADB Economics Working Paper Series 208, Asian Development Bank.
  4. Alexis Cruz-Rodriguez, 2013. "Choosing and Assessing Exchange Rate Regimes: a Survey of the Literature," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 28(2), pages 37-61, October.
  5. Rajan, Ramkishen, 2011. "Management of Exchange Rate Regimes in Emerging Asia," ADBI Working Papers 322, Asian Development Bank Institute.
  6. Inci Gumus, 2011. "Exchange Rate Policy and Sovereign Spreads in Emerging Market Economies," Review of International Economics, Wiley Blackwell, vol. 19(4), pages 649-663, 09.

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