Exchange rate regimes: choices and consequences, Volume 1 by Atish R. Ghosh, Anne Marie Gulde, Holger C. Wolf

By Atish R. Ghosh, Anne Marie Gulde, Holger C. Wolf

Few subject matters in overseas economics are as arguable because the selection of an trade price regime. because the breakdown of the Bretton Woods procedure within the early Seventies, international locations have followed a large choice of regimes, starting from natural floats at one severe to foreign money forums and dollarization on the different. whereas a monstrous theoretical literature explores the alternative and results of alternate expense regimes, the abundance of attainable results makes it tricky to set up transparent relationships among regimes and customary macroeconomic coverage ambitions reminiscent of inflation and growth.This booklet takes a scientific examine the proof on macroeconomic functionality below substitute trade expense regimes, drawing at the event of a few one hundred fifty member nations of the overseas financial Fund over the previous thirty years. between different questions, it asks no matter if pegging the trade cost ends up in decrease inflation, no matter if floating trade charges are linked to quicker output development, and no matter if pegged regimes are fairly susceptible to foreign money and different crises. The booklet attracts on heritage and idea to delineate the controversy and on average statistical how you can verify the empirical proof, and contains a CD-ROM containing the information set used.

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A country with The Theory of Exchange Rate Regimes 37 a poor inflation record and subject to significant real shocks must decide between the insulating properties of flexible exchange rates and the credibility benefits obtainable by pegging the exchange rate. Beyond credibility and stabilization, other factors enter into the choice of regime. We conclude by briefly touching upon three of these: fiscal constraints, financial fragility, and exits. With a fixed exchange rate and high capital mobility, fiscal policy has to shoulder the entire burden of macroeconomic stabilization.

This sample consists only of those observations that are classified in the same category (fixed, intermediate, or floating) by both the de jure measure and by a de facto measure that we construct. In essence, the consensus sample drops ‘‘hard’’ floats and ‘‘soft’’ pegs. To preview the results, eliminating these ambiguous cases does not materially affect our findings on inflation performance, but it is of some importance for the growth results. 12 Single currency pegs are the largest group, accounting for almost one third of the observations, followed by basket pegs and managed floats.

To this end, we construct a ‘‘consensus classification’’ that essentially drops soft pegs and hard floats by using the intersection of the de jure classification and a de facto classification that we construct. We first compute a continuous de facto measure based on observed exchange rate behavior, then convert it into a discrete threeway classification of pegged, intermediate, and floating regimes using the relative frequency distribution of regimes in the de jure classification. The consensus sample then simply consists of all observations for which the two classification methods agree.

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