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Exits From Pegged Regimes

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  • Inci Ötker
  • Rupa Duttagupta

Abstract

Using countries'' de facto exchange rate regimes during 1985-2002, this paper analyzes the determinants of exits from pegged regimes, where exits involve shifts to more or less flexible regimes, or adjustments within the existing regime. Distinguishing episodes characterized by "exchange market pressure" from orderly exits, the estimated probabilities of alternative exit episodes indicate that crises are preceded by a deterioration of economic conditions. In contrast, orderly exits to less flexible regimes are preceded by long regime duration, a decline in financial liabilities of the banking system, and an increase in official reserves. Exits to more flexible regimes are associated with both emerging market and other developing countries, and an increase in trade openness and government borrowing from banks. The results are robust to alternative sensitivity analyses and have reasonable predictive performance, confirming that economic and financial conditions and regime duration play important roles in determining the future course of exchange rate regimes.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/147.

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Length: 35
Date of creation: 01 Jul 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/147

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Related research

Keywords: Exchange rate regimes; Floating exchange rates; Currency pegs; exchange rate; exchange rate regime; trade openness; flexible exchange rate; flexible exchange rate regime; export growth; exchange rate policies; real exchange rate; exchange rate anchor; exchange rate policy; exchange rate risk; exchange rates; real effective exchange rate; export performance; effective exchange rate; terms of trade; de facto exchange rate regimes; trade shocks; exchange rate movements; flexible exchange rate regimes; basket of currencies; currency basket; prevailing exchange rate; nominal exchange rate; terms of trade shocks; foreign exchange; exchange restrictions; exchange rate arrangements; exchange arrangements; exchange rate appreciation; rigid exchange rate regime; currency boards; trade integration; current account balance; exchange rate mechanism; exchange rate flexibility; alternative exchange rate; alternative exchange rate regime; tariff preferences; value of exports; exchange rate volatility; trading partner; exchange rate level; exchange rate crises; domestic banks; global shocks; exchange rate system; real exchange rates; exchange rate paths; increased trade; dollar exchange rate; intermediate exchange rate regimes; exchange rate changes; de facto exchange rate regime; nominal exchange rates; foreign exchange market; export quotas; export price; exchange controls; current accounts; exchange rate regime classification; intermediate exchange rate; economic integration; real exchange rate appreciation;

References

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  1. Sebastian Edwards & Julio A. Santaella, 1992. "Devaluation Controversies in the Developing Countries: Lessons From the Bretton Woods Era," NBER Working Papers 4047, National Bureau of Economic Research, Inc.
  2. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
  3. Ramon Moreno, 1995. "Macroeconomic behavior during periods of speculative pressure or realignment: evidence from Pacific Basin economies," Pacific Basin Working Paper Series 95-05, Federal Reserve Bank of San Francisco.
  4. Collins, Susan M., 1996. "On becoming more flexible: Exchange rate regimes in Latin America and the Caribbean," Journal of Development Economics, Elsevier, vol. 51(1), pages 117-138, October.
  5. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
  6. Flood, Robert P & Rose, Andrew K, 1998. "Understanding Exchange Rate Volatility Without the Contrivance of Macroeconomics," CEPR Discussion Papers 1944, C.E.P.R. Discussion Papers.
  7. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  8. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  9. Andrew Berg & Catherine Pattillo, 1999. "Are Currency Crises Predictable? A Test," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 1.
  10. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
  11. Michael W. Klein & Nancy P. Marion, 1994. "Explaining the Duration of Exchange-Rate Pegs," NBER Working Papers 4651, National Bureau of Economic Research, Inc.
  12. Masson, Paul R., 2001. "Exchange rate regime transitions," Journal of Development Economics, Elsevier, vol. 64(2), pages 571-586, April.
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Citations

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Cited by:
  1. Post, Erik, 2007. "Macroeconomic imbalances and exchange rate regime shifts," Working Paper Series 2007:4, Uppsala University, Department of Economics.
  2. Hefeker, Carsten, 2004. "Default, Electoral Uncertainty and the Choice of Exchange Regime," HWWA Discussion Papers 298, Hamburg Institute of International Economics (HWWA).
  3. Ahmed Atil Asici, 2008. "Parametric and Non-Parametric Approaches to Exits from Fixed Exchange Rate Regimes," Working Papers 401, Economic Research Forum, revised May 2008.
  4. Asici, Ahmet Atil & Ivanova, Nadezhda & Wyplosz, Charles, 2005. "How to Exit from Fixed Exchange Rate Regimes," CEPR Discussion Papers 5141, C.E.P.R. Discussion Papers.
  5. Enrica Detragiache & Eisuke Okada & Ashoka Mody, 2005. "Exits From Heavily Managed Exchange Rate Regimes," IMF Working Papers 05/39, International Monetary Fund.
  6. Husain, Aasim M. & Mody, Ashoka & Rogoff, Kenneth S., 2005. "Exchange rate regime durability and performance in developing versus advanced economies," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 35-64, January.
  7. Aasim M. Husain & Ashoka Mody & Nienke Oomes & Robin Brooks & Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 03/243, International Monetary Fund.
  8. Sébastien Wälti, 2005. "The duration of fixed exchange rate regimes," The Institute for International Integration Studies Discussion Paper Series iiisdp96, IIIS.
  9. Nikola Fabris & Slobodan Aćimović, 2010. "Exchange Rate Policy in Serbia," Transition Studies Review, Springer, vol. 17(1), pages 170-180, May.
  10. Sean Barrett, 2005. "Risk Equalisation and Competition in the Irish Health Insurance Market," Trinity Economics Papers 200058, Trinity College Dublin, Department of Economics.
  11. Quader, Syed Manzur, 2004. "Floating Exchange Rate Regime," MPRA Paper 26163, University Library of Munich, Germany.
  12. Eichengreen, Barry, 2003. "The Accession Economies’ Rocky Road to the Euro," Institute of European Studies, Working Paper Series qt07h5c51w, Institute of European Studies, UC Berkeley.
  13. Andrea Bubula & Inci Ötker, 2003. "Are Pegged and Intermediate Regimes More Crisis Prone?," IMF Working Papers 03/223, International Monetary Fund.
  14. repec:tcd:wpaper:tep8 is not listed on IDEAS
  15. Raul Razo-Garcia, 2011. "The Duration of Intermediate Exchange Rate Regimes and Capital Controls," Carleton Economic Papers 11-01, Carleton University, Department of Economics, revised 17 Oct 2011.
  16. Ralph Setzer, 2005. "The Political Economy of Fixed Exchange Rates: A Survival Analysis," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 265/2005, Department of Economics, University of Hohenheim, Germany.

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