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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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References listed on IDEAS
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. 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)
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  2. 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)
  3. Panizza, U. & Stein, E.H. & Hausmann, R., 2000. "Why Do Countries Float the Way They Float?," RES Working Papers 418, Inter-American Development Bank, Research Department.
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  4. Ernesto Stein and Jorge Streb., 1994. "Political Stabilization Cycles in High Inflation Economies," Center for International and Development Economics Research (CIDER) Working Papers C94-039, University of California at Berkeley.
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  5. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August. [Downloadable!] (restricted)
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  6. Jeffrey A. Frankel and Shang-Jin Wei., 1993. "Emerging Currency Blocs," Center for International and Development Economics Research (CIDER) Working Papers C93-026, University of California at Berkeley.
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  7. 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.
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  8. 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)
  9. repec:fth:inadeb:418 is not listed on IDEAS
  10. Ernesto H. Stein & Jorge M. Streb, 1999. "Elections and the Timing of Devaluations," CEMA Working Papers: Serie Documentos de Trabajo. 140, Universidad del CEMA. [Downloadable!]
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  11. 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. [Downloadable!] (restricted)
  12. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Agnes Benassy-Quere, 1996. "Exchange rate regimes and policies in Asia," Working Papers 1996-07, CEPII research center. [Downloadable!]
  14. Jeffrey A. Frankel., 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," Center for International and Development Economics Research (CIDER) Working Papers C93-007, University of California at Berkeley.
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  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. 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!]
  5. Agnes Benassy-Quere & Benoit Cœure, 2002. "The Survival of Intermediate Exchange Rate Regimes," Working Papers 2002-07, CEPII research center. [Downloadable!]
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  6. 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)
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  7. 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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  8. 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!]
  9. Jeannine Bailliu & Robert Lafrance & Jean-François Perrault, 2002. "Does Exchange Rate Policy Matter for Growth?," Working Papers 02-17, Bank of Canada. [Downloadable!]
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  10. 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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  11. 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!]
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  12. Masahiro Kawai & Richard Newfarmer & Sergio L. Schmukler, 2005. "Financial Crises: Nine Lessons from East Asia," Eastern Economic Journal, Palgrave Macmillan Journals, vol. 31(2), pages 185-207, Spring. [Downloadable!] (restricted)
  13. 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!]
  14. 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!]
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  15. 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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