The Art of Gracefully Exiting a Peg
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.
(This abstract was borrowed from another version of this item.)
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.:
- Levine, Ross, 1992.
"Financial structures and economic development,"
Policy Research Working Paper Series
849, The World Bank.
- Roberto Chang & Andres Velasco, 1999.
"Liquidity crises in emerging markets: Theory and policy,"
FRB Atlanta Working Paper
99-15, Federal Reserve Bank of Atlanta.
- Roberto Chang & Andrés Velasco, 2000. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 11-78 National Bureau of Economic Research, Inc.
- Roberto Chang & Andrés Velasco, 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," Documentos de Trabajo 59, Centro de Economía Aplicada, Universidad de Chile.
- Chang, R. & Velasco, A., 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," Working Papers 99-14, C.V. Starr Center for Applied Economics, New York University.
- Roberto Chang & Andres Velasco, 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Working Papers 7272, National Bureau of Economic Research, Inc.
- Reinhart, Carmen & Kaminsky, Graciela, 2000.
"Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
[The twin crises: Te causes of banking and balance of payments problems]," MPRA Paper 13842, University Library of Munich, Germany.
- 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, vol. 89(3), pages 473-500, June.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
- 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.
- 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.).
- Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
- Guillermo A. Calvo & Carmen M. Reinhart, 2002.
"Fear of Floating,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 117(2), pages 379-408.
- Barry J. Eichengreen & Inci Ã–tker & A. Javier Hamann & Esteban Jadresic & R. B. Johnston & Hugh Bredenkamp & Paul R. Masson, 1998. "Exit Strategies; Policy Options for Countries Seeking Exchange Rate Flexibility," IMF Occasional Papers 168, International Monetary Fund.
- Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
- 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.
- Favero, Carlo A. & Giavazzi, Francesco, 2002. "Is the international propagation of financial shocks non-linear?: Evidence from the ERM," Journal of International Economics, Elsevier, vol. 57(1), pages 231-246, June.
- Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
- Reinhart, Carmen & Rogoff, Kenneth, 2004.
"The modern history of exchange rate arrangements: A reinterpretation,"
14070, University Library of Munich, Germany.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
- Roberto Rigobon, 1999. "On the Measurement of the International Propagation of Shocks," NBER Working Papers 7354, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:eso:journl:v:34:y:2003:i:3:p:211-228. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Frank Walsh)
If references are entirely missing, you can add them using this form.