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Verifying exchange rate regimes

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Author Info
Serven, Luis
Frankel, Jeffrey
Fajnzylber, Eduardo
Schmukler, Sergio

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Abstract

Credibility and transparency are at the core of the current debate about exchange rate regimes. The steady growth in the magnitude and variability of international capital flows has complicated the question of whether to use floating, fixed, or intermediate exchange rate regimes. Emerging market economies are abandoning basket pegs, crawling pegs, bands, adjustable pegs, and various combinations of these. One of several reasons intermediate regimes have fallen out of favor is that they are not transparent; it is very difficult to verify them. Verifiability is a concrete example of the principle of"transparency"so often invoked in discussions of the new international financial architecture but so seldom made precise. A simple peg or a simple float may be easier for market participants to verify than a more complicated intermediate regime. The authors investigate how difficult it is for investors to verify from observable data whether the authorities are in fact following the exchange rate regime they claim to be following. Of the various intermediate regimes, they focus on basket pegs with bands. Statistically, it can take a surprisingly long span of data for an econometrician or investor to verify whether such a regime is actually in operation. The authors find that verification becomes more difficult as the regime's bands widen or more currencies enter the basket peg. At the other extreme, they also analyze regimes described as the regime's bands widen or more currencies enter the basket peg. At the other extreme, they also analyze regimes described as free floating and find that in some cases the observed exchange rate data do validate the announced regime.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2397.

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Date of creation: 31 Jul 2000
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Handle: RePEc:wbk:wbrwps:2397

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Keywords: Payment Systems&Infrastructure; Economic Theory&Research; Environmental Economics&Policies; Fiscal&Monetary Policy; ICT Policy and Strategies; Fiscal&Monetary Policy; Economic Theory&Research; ICT Policy and Strategies; Economic Stabilization; Macroeconomic Management;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December. [Downloadable!] (restricted)
    Other versions:
  2. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall. [Downloadable!] (restricted)
    Other versions:
  3. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Ernesto H. Stein & Jorge M. Streb, 1999. "Elections and the Timing of Devaluations," RES Working Papers 4164, Inter-American Development Bank, Research Department. [Downloadable!]
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  8. Wei, S.J. & Frankel, J.A., 1992. "Yen Bloc or Dollar Bloc: Exchange Rate Policies of the East Asian Economies," Papers 92-08, University of Birmingham - International Financial Group.
    Other versions:
  9. Jeffrey A. Frankel, 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Chapters, in: Regionalism and Rivalry: Japan and the United States in Pacific Asia, pages 53-88 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  10. Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. repec:fth:inadeb:418 is not listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jeffrey A. Frankel & Shang-Jin Wei, 2008. "Estimation of De Facto Exchange Rate Regimes: Synthesis of the Techniques for Inferring Flexibility and Basket Weights," NBER Working Papers 14016, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Tony Cavoli & Ramkishen S. Rajan, 2005. "Have Exchange Rate Regimes in Asia become More Flexible Post crisis? Re- Visiting the Evidence," SCAPE Policy Research Working Paper Series 0519, National University of Singapore, Department of Economics, SCAPE. [Downloadable!]
  3. Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Aloy, Marcel & Moreno-Dodson, Blanca & Nancy, Gilles, 2008. "Intertemporal adjustment and fiscal policy under a fixed exchange rate regime," Policy Research Working Paper Series 4607, The World Bank. [Downloadable!]
  5. Frömmel, Michael & Schobert, Franziska, 2003. "Nominal Anchors in EU Accession Countries - Recent Experiences," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-267, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  6. Hiroya Akiba & Yukihiro Iida & Yoshihiro Kitamura, 2009. "The optimal exchange rate regime for a small country," International Economics and Economic Policy, Springer, vol. 6(3), pages 315-343, October. [Downloadable!] (restricted)
  7. Agnes Benassy-Quere & Benoit Cœure, 2002. "The Survival of Intermediate Exchange Rate Regimes," Working Papers 2002-07, CEPII research center. [Downloadable!]
    Other versions:
  8. Sergio L. Schmukler & Luis Serven, 2002. "Pricing Currency Risk: Facts and Puzzles from Currency Boards," NBER Working Papers 9047, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Eduardo Levy Yeyati & Augusto de la Torre & Sergio Schmukler, 2003. "Living and Dying with Hard Pegs: The Rise and Fall of Argentina´s Currency Board," Business School Working Papers catorce, Universidad Torcuato Di Tella. [Downloadable!]
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  10. 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. [Downloadable!]
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  12. Montiel, Peter & Serven, Luis, 2004. "Macroeconomic stability in developing countries - How much is enough?," Policy Research Working Paper Series 3456, The World Bank. [Downloadable!]
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  13. Diego Valderrama & Mark M. Spiegel, 2003. "Currency boards, dollarized liabilities, and monetary policy credibility," Working Papers in Applied Economic Theory 2003-07, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  14. Ephraim Clark & Amel Zenaidi & Monia Gharbi Trabelsi, 2008. "Capital market integration, currency crises, and exchange rate regimes 1990-2002," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(3), pages 280-306. [Downloadable!]
  15. Masahiro Kawai & Richard Newfarmer & Sergio L. Schmukler, 2003. "Financial Crises: Nine Lessons From East Asia," Finance Working Papers 482, East Asian Bureau of Economic Research. [Downloadable!]
  16. Eduardo Levy Yeyati, 2005. "Financial Dollarisation: Evaluating The Consequences," Business School Working Papers findollarisation, Universidad Torcuato Di Tella. [Downloadable!]
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  17. Pontines, Victor & Siregar, Reza, 2009. "Intervention index and exchange rate regimes: the cases of selected East-Asian economies," MPRA Paper 17138, University Library of Munich, Germany. [Downloadable!]
  18. Reuven Glick, 2000. "Fixed or floating: is it still possible to manage in the middle?," Pacific Basin Working Paper Series 00-02, Federal Reserve Bank of San Francisco. [Downloadable!]
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  19. Masahiro Kawai & Richard Newfarmer & Sergio L. Schmukler, 2005. "Financial Crises: Nine Lessons from East Asia," Eastern Economic Journal, Eastern Economic Association, vol. 31(2), pages 185-207, Spring. [Downloadable!]
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