Exchange Rate Regimes: Does What Countries Say Matter?

Traditionally, the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions has been the main source of information about the exchange rate policies pursued by member countries. The classification contained therein has been used to document the evolution of exchange rate regimes over time as well as to study the relationship between economic performance and the choice of exchange rate system. Recently, a number of authors have challenged the results of these studies on the grounds that countries may not always be following the exchange rate policy that they have announced. New classifications have thus been created, designed to represent countries' actual exchange rate policy as opposed to their declared policy. It is sometimes claimed that the new so-called de facto classifications are superior to the older de jure classifications. In this paper we argue that neither the officially declared exchange rate regime nor the de facto regime tells the full story about exchange rate policy. Both contain useful information and need to be taken into account. In addition we argue that countries that claim to be floating but in fact have relatively stable exchange rates are not necessarily breaking any commitment, as sometimes has been suggested. Exchange rate stability may be the result of optimally chosen monetary policies. Furthermore, countries that use monetary policy instruments actively to stabilize their exchange rate may rationally not want to announce and commit to a fixed exchange rate because of a fear of being subject to speculative attacks. We present some empirical evidence consistent with this interpretation. Copyright 2005, International Monetary Fund