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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. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 473-500, June.
  2. Catherine A. Pattillo & Andrew Berg, 1998. "Are Currency Crises Predictable? a Test," IMF Working Papers 98/154, International Monetary Fund.
  3. Sebastian Edwards & Julio Santaella, 1993. "Devaluation Controversies in the Developing Countries: Lessons from the Bretton Woods Era," NBER Chapters, National Bureau of Economic Research, Inc, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 405-460 National Bureau of Economic Research, Inc.
  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. Flood, Robert P & Rose, Andrew K, 1999. "Understanding Exchange Rate Volatility without the Contrivance of Macroeconomics," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(459), pages F660-72, November.
  6. Collins, Susan M., 1996. "On becoming more flexible: Exchange rate regimes in Latin America and the Caribbean," Journal of Development Economics, Elsevier, Elsevier, vol. 51(1), pages 117-138, October.
  7. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
  8. Maurice Obstfeld, 1984. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
  9. Ramon Moreno, 1995. "Macroeconomic behavior during periods of speculative pressure or realignment: evidence from Pacific Basin economies," Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco 95-05, Federal Reserve Bank of San Francisco.
  10. Paul R. Masson, 2000. "Exchange Rate Regime Transitions," IMF Working Papers 00/134, International Monetary Fund.
  11. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 351-366, November.
  12. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
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Citations

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Cited by:
  1. Hefeker, Carsten, 2007. "Default, Electoral Uncertainty and the Choice of Exchange Regime," Proceedings of the German Development Economics Conference, Göttingen 2007 13, Verein für Socialpolitik, Research Committee Development Economics.
  2. Sean Barrett, 2005. "Risk Equalisation and Competition in the Irish Health Insurance Market," Trinity Economics Papers, Trinity College Dublin, Department of Economics 200058, Trinity College Dublin, Department of Economics.
  3. Quader, Syed Manzur, 2004. "Floating Exchange Rate Regime," MPRA Paper 26163, University Library of Munich, Germany.
  4. repec:tcd:wpaper:tep8 is not listed on IDEAS
  5. Ahmet Asici; Nadezhda Ivanova; Charles Wyplosz, 2005. "How to Exit From Fixed Exchange Rate Regimes?," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 03-2005, Economics Section, The Graduate Institute of International Studies.
  6. Ahmet Atil Asici, 2010. "Parametric and non-parametric approaches to exits from fixed exchange rate regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 15(4), pages 381-406.
  7. Enrica Detragiache & Eisuke Okada & Ashoka Mody, 2005. "Exits From Heavily Managed Exchange Rate Regimes," IMF Working Papers 05/39, International Monetary Fund.
  8. Nikola Fabris & Slobodan Aćimović, 2010. "Exchange Rate Policy in Serbia," Transition Studies Review, Springer, Springer, vol. 17(1), pages 170-180, May.
  9. Eichengreen, Barry, 2003. "The Accession Economies’ Rocky Road to the Euro," Institute of European Studies, Working Paper Series, Institute of European Studies, UC Berkeley qt07h5c51w, Institute of European Studies, UC Berkeley.
  10. Sébastien Wälti, 2005. "The duration of fixed exchange rate regimes," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp96, IIIS.
  11. 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, Elsevier, vol. 52(1), pages 35-64, January.
  12. Post, Erik, 2007. "Macroeconomic imbalances and exchange rate regime shifts," Working Paper Series, Uppsala University, Department of Economics 2007:4, Uppsala University, Department of Economics.
  13. Raul Razo-Garcia, 2011. "The Duration of Intermediate Exchange Rate Regimes and Capital Controls," Carleton Economic Papers, Carleton University, Department of Economics 11-01, Carleton University, Department of Economics, revised 17 Oct 2011.
  14. 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.
  15. Andrea Bubula & Inci Ötker, 2003. "Are Pegged and Intermediate Regimes More Crisis Prone?," IMF Working Papers 03/223, International Monetary Fund.
  16. Ralph Setzer, 2005. "The Political Economy of Fixed Exchange Rates: A Survival Analysis," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim, Department of Economics, University of Hohenheim, Germany 265/2005, Department of Economics, University of Hohenheim, Germany.

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