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Pegging emerging currencies in the face of dollar swings

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  • Virginie Coudert
  • Cécile Couharde
  • Valérie Mignon

Abstract

The aim of this paper is to study ruptures of exchange-rate pegs by focusing on the fluctuations of the anchor currency. We test for the hypothesis that currencies linked to the USD are more likely to loosen their peg when the USD is appreciating, while sticking to it otherwise. To this end, we estimate smooth-transition regression models for a sample of 28 emerging currencies over the 1994-2011 period. Our findings show that while the real effective exchange rates of most of these countries tend to co-move with that of the USD in times of depreciation, this relationship is frequently reversed when the US currency appreciates over a certain threshold. Such nonlinear effects are especially at stake in Asia where growth is export-oriented.

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Bibliographic Info

Paper provided by CEPII research center in its series Working Papers with number 2012-21.

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Date of creation: Oct 2012
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Handle: RePEc:cii:cepidt:2012-21

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Keywords: real exchange rates; anchor currency; rupture of pegs; smooth transition regression models;

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References

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  1. Masson, Paul R., 2001. "Exchange rate regime transitions," Journal of Development Economics, Elsevier, vol. 64(2), pages 571-586, April.
  2. Coudert, Virginie & Couharde, Cécile & Mignon, Valérie, 2011. "Exchange rate volatility across financial crises," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3010-3018, November.
  3. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  4. Michael W. Klein & Nancy P. Marion, 1994. "Explaining the Duration of Exchange-Rate Pegs," NBER Working Papers 4651, National Bureau of Economic Research, Inc.
  5. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  6. Jansen, Eilev S & Terasvirta, Timo, 1996. "Testing Parameter Constancy and Super Exogeneity in Econometric Equations," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(4), pages 735-63, November.
  7. Alberto Alesina & Alexander Wagner, 2003. "Choosing (and reneging on) exchange rate regimes," NBER Working Papers 9809, National Bureau of Economic Research, Inc.
  8. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
  9. Bracke, Thierry & Bunda, Irina, 2011. "Exchange rate anchoring - Is there still a de facto US dollar standard?," Working Paper Series 1353, European Central Bank.
  10. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, vol. 74(1), pages 59-75, September.
  11. Charalambos G. Tsangarides, 2010. "Crisis and Recovery," IMF Working Papers 10/242, International Monetary Fund.
  12. Baxter, M. & Stockman, A.C., 1988. "Business Cycles And The Exchange Rate System: Some International Evidence," RCER Working Papers 140, University of Rochester - Center for Economic Research (RCER).
  13. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2008. "Do Terms of Trade Drive Real Exchange Rates? Comparing Oil and Commodity Currencies," Working Papers 2008-32, CEPII research center.
  14. repec:hal:cepnwp:hal-00845254 is not listed on IDEAS
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Cited by:
  1. Benjamin Keddad, 2013. "Assessing Asian Exchange Rates Coordination under Regional Currency Basket System," Working Papers halshs-00862254, HAL.
  2. Benjamin Keddad, 2013. "Exchange rate coordination in Asia under regional currency basket systems," Economics Bulletin, AccessEcon, vol. 33(4), pages 2913-2929.
  3. Baaziz, Yosra & Labidi, Moez & Lahiani, Amine, 2013. "Does the South African Reserve Bank follow a nonlinear interest rate reaction function?," Economic Modelling, Elsevier, vol. 35(C), pages 272-282.

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