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The Art of Gracefully Exiting a Peg

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  • Asici, Ahmet
  • Wyplosz, Charles

Abstract

The wave of liberalization of capital movements, which swept Europe in the 1980s and the emerging market countries in the 1990s, has given rise to the two-corner strategy. According to this view only two exchange rate regimes are sustainable: hard pegs and fully flexible rates. Soft pegs in the middle are seen as doomed, open to irresistible and unpredictable speculative attacks and historical evidence shows clearly that increasing number of countries have exited the soft middle ground, mostly towards the flexible end of the spectrum. However, not all the exits from hard pegs to flexible arrangements are happy. Most countries hesitate to leave the peg when it is working properly, and consider exit option only when they are facing speculative pressure, and then it often is too late. This paper aims to analyze the factors contributing to peaceful exits, that is exiting without a significant loss in the value of the domestic currency. It seeks to find conditions that need to be satisfied to ensure an exit without significant economic costs. Historical record of exchange rate classification comes from Reinhart and Rogoff's path-breaking study on this subject, where they classified regimes on the basis of observed, de facto, currency movements rather than the announced, de jure, official rates. Some interesting results we have found may be put as follows: Cold-blooded exits enacted when the macroeconomic conditions are favorable, that is countries planning to leave a peg are advised to do it when it is least necessary and least expected. Another surprising result is that, efficient and deep financial markets do not help with exits. Countries encouraged to exit pegs before they fully liberalize their financial account and deepen their markets. The study covers the period 1975-2001. Our choice criteria provide 55 cases of exits, 27 of which is peaceful and the rest 28 cases troubled ones. We estimate non-structural probit models with monthly and annual data.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4432.

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Date of creation: 2003
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Publication status: Published in The Economic and Social Review 3.34(2003): pp. 211-228
Handle: RePEc:pra:mprapa:4432

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Keywords: Exit; exchange rate regimes; currency crisis;

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References

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  1. Barry J. Eichengreen & Inci Ötker & A. Javier Hamann & Esteban Jadresic & R. B. Johnston & Hugh Bredenkamp & Paul R. Masson, 1998. "Exit Strategies," IMF Occasional Papers, International Monetary Fund 168, International Monetary Fund.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  3. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  4. Favero, Carlo A. & Giavazzi, Francesco, 2002. "Is the international propagation of financial shocks non-linear?: Evidence from the ERM," Journal of International Economics, Elsevier, Elsevier, vol. 57(1), pages 231-246, June.
  5. Chang, R. & Velasco, A., 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," Working Papers, C.V. Starr Center for Applied Economics, New York University 99-14, C.V. Starr Center for Applied Economics, New York University.
  6. Levine, Ross, 1992. "Financial structures and economic development," Policy Research Working Paper Series, The World Bank 849, The World Bank.
  7. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 534, Board of Governors of the Federal Reserve System (U.S.).
  8. Roberto Rigobon, 1999. "On the Measurement of the International Propagation of Shocks," NBER Working Papers 7354, National Bureau of Economic Research, Inc.
  9. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 544, Board of Governors of the Federal Reserve System (U.S.).
  10. Sergio Rebelo & Carlos A. Vegh, 2006. "When Is It Optimal to Abandon a Fixed Exchange Rate?," NBER Working Papers 12793, National Bureau of Economic Research, Inc.
  11. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series, The World Bank 2146, The World Bank.
  12. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(2), pages 3-24, Spring.
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Citations

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Cited by:
  1. Lin, Shu & Ye, Haichun, 2011. "The role of financial development in exchange rate regime choices," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(4), pages 641-659, June.
  2. Sébastien Wälti, 2005. "The duration of fixed exchange rate regimes," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp96, IIIS.
  3. Ahmet Atil Asici, 2007. "Parametric and Non-parametric Approaches to Exits from Fixed Exchange Rate Regimes," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 14-2007, Economics Section, The Graduate Institute of International Studies.
  4. 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.
  5. Michael Frömmel, 2010. "Volatility Regimes in Central and Eastern European Countries’ Exchange Rates," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 2-21, February.
  6. Hans Genberg & Alexander K. Swoboda, 2005. "Exchange Rate Regimes: Does What Countries Say Matter?," IMF Staff Papers, Palgrave Macmillan, vol. 52(si), pages 8.
  7. Sfia, Mohamed Daly, 2007. "Régimes de change: Le chemin vers la flexibilité," MPRA Paper 4085, University Library of Munich, Germany.
  8. 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.
  9. Enrica Detragiache & Eisuke Okada & Ashoka Mody, 2005. "Exits From Heavily Managed Exchange Rate Regimes," IMF Working Papers, International Monetary Fund 05/39, International Monetary Fund.
  10. Pierre-Richard Agenor, 2004. "Orderly exits from adjustable pegs and exchange rate bands," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 7(2), pages 83-108.
  11. 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, University of Munich, Department of Economics 2072, University of Munich, Department of Economics.
  12. Emilija Beker, 2006. "Exchange rate arrangements from extreme to normal," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 53(1), pages 31-49, March.
  13. Gilda Fernandez & Cem Karacadag & Rupa Duttagupta, 2004. "From Fixed to Float," IMF Working Papers, International Monetary Fund 04/126, International Monetary Fund.
  14. repec:tcd:wpaper:tep8 is not listed on IDEAS
  15. Gerlach-Kristen, Petra, 2006. "Internal and external shocks in Hong Kong: Empirical evidence and policy options," Economic Modelling, Elsevier, Elsevier, vol. 23(1), pages 56-75, January.

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