IDEAS home Printed from https://ideas.repec.org/a/pal/imfstp/v55y2008i3p445-480.html
   My bibliography  Save this article

Fear of Declaring: Do Markets Care What Countries Say About Their Exchange Rate Policies?

Author

Listed:
  • Adolfo Barajas
  • Lennart Erickson
  • Roberto Steiner

Abstract

Beginning with the papers by Calvo and Reinhart (2002) and Levy Yeyati and Sturzenegger (2001), there has been growing recognition of a disconnect between what emerging economies say they do in exchange rate policy (words), and what they do in practice (deeds). More specifically, a “fear of floating” behavior has been identified, whereby countries that classify themselves as floating exchange rate regimes intervene quite vigorously over time. While many persuasive arguments have been offered as to why countries intervene, the question remains as to why intervening countries continue to classify their regimes as floating. Thus, concurrently with fear of floating, there seems to be a “fear of declaring.” This paper examines one possible reason for fear of declaring: that international capital markets might reward countries that are classified toward the flexible end of the spectrum. Based on the JPMorgan Emerging Market Bond Index spread, we use a panel data approach that exploits both time and cross-country variability. With some qualifications, we find that spreads are lower in countries that have a fixed exchange rate regime, whether de jure or de facto, implying that there is no evidence that markets punish fear of floating. One possible explanation for this puzzle—that is, countries intervene but say that they do not, even though markets appear to be, at a minimum, indifferent to intervention—arises from the fact that there is evidence that de jure floating regimes may fare better in crisis situations. IMF Staff Papers (2008) 55, 445–480. doi:10.1057/imfsp.2008.14

Suggested Citation

  • Adolfo Barajas & Lennart Erickson & Roberto Steiner, 2008. "Fear of Declaring: Do Markets Care What Countries Say About Their Exchange Rate Policies?," IMF Staff Papers, Palgrave Macmillan, vol. 55(3), pages 445-480, July.
  • Handle: RePEc:pal:imfstp:v:55:y:2008:i:3:p:445-480
    as

    Download full text from publisher

    File URL: http://www.palgrave-journals.com/imfsp/journal/v55/n3/pdf/imfsp200814a.pdf
    File Function: Link to full text PDF
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: http://www.palgrave-journals.com/imfsp/journal/v55/n3/full/imfsp200814a.html
    File Function: Link to full text HTML
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alexis Cruz-Rodriguez, 2013. "Choosing and Assessing Exchange Rate Regimes: a Survey of the Literature," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 28(2), pages 37-61, October.
    2. S. Rajan, Ramkishen, 2010. "The Evolution and Impact of Asian Exchange Rate Regimes," ADB Economics Working Paper Series 208, Asian Development Bank.
    3. Adolfo Barajas & Roberto Steiner & Leonardo Villar & Cesar Pabon, 2014. "Inflation Targeting in Latin America," Research Department Publications IDB-WP-473, Inter-American Development Bank, Research Department.
    4. Ramkishen S. Rajan, 2011. "Management of Exchange Rate Regimes in Emerging Asia," Macroeconomics Working Papers 23214, East Asian Bureau of Economic Research.
    5. Roberto Steiner & Adolfo Barajas & César Pabón & Leonardo Villar, 2014. "Singular Focus or Multiple Objectives? What the Data Tell Us about Inflation Targeting in Latin America," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Fall 2014), pages 177-213, June.
    6. Dionísio Dias Carneiro & Thomas Wu, 2010. "Sovereign Risk and Out-of-Equilibrium Exchange Rate Dynamics," Review of Development Economics, Wiley Blackwell, vol. 14(4), pages 699-711, November.
    7. 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.
    8. Ghanem Darine, 2012. "Fixed Exchange Rate Regimes and Inflation Performance: Evidence from MENA Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 8(1), pages 1-30, August.
    9. Inci Gumus, 2011. "Exchange Rate Policy and Sovereign Spreads in Emerging Market Economies," Review of International Economics, Wiley Blackwell, vol. 19(4), pages 649-663, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:imfstp:v:55:y:2008:i:3:p:445-480. 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: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.palgrave-journals.com/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.