What Is Learned from a Currency Crisis, Fear of Floating, or Hollow Middle? Identifying Exchange Rate Policy in Crisis Countries

This paper develops a new methodology to infer the de facto exchange rate regime, based on a structural VAR model with sign restrictions. The methodology is applied to data from eleven emerging markets that experienced a currency crisis. The main findings are as follows: (i) to be consistent with the “hollow middle” hypothesis, many countries moved toward hard pegs, such as dollarization and a currency board, or more flexible exchange rate arrangements that are close to the free float in the post-crisis period; and (ii) the cases where a country overstates its exchange rate flexibility (including the case of “fear of floating”) are found in all samples, but such cases tend to be less frequently found in the post-crisis period than in the pre-crisis period.