Verifying Exchange Rate Regimes

• Main Authors: Frankel, Jeffrey, Fajnzylber, Eduardo, Schmukler, Sergio L., Servén, Luis
• Format: Other/Unknown Material
• Language: English
• Published: World Bank, Washington, DC 2000
• Subjects: basket of currencies; basket of currency peg; basket of goods; bilateral trade; capital flows; capital inflows; capital mobility; central bank; central banks; crawling peg; crawling pegs; credibility; currency board; currency boards; currency exchange; currency exchange rates; currency unions; debt; deutsche mark; devaluation; developing countries; emerging countries; emerging markets; exchange rate; exchange rate determination; exchange rate policy; exchange rate regime; exchange rate stability; expected value; financial markets; fixed exchange rate; fixed exchange rates; floating exchange rate; floating exchange rates; foreign currency; foreign exchange; foreign exchange markets; foreign exchange reserves; future research; GDP; indexation; inflation rates; interest rates; intermediate regimes; international capital flows; international investors; international monetary economics; international monetary fund; japanese yen; macroeconomics; monetary authorities; monetary economics; monetary policy; monetary regime; monetary union; nominal anchor; numeraire; output; pegs; policy research; political instability; random walk; reserves; simulations; spot exchange rates; statistical inference; swiss francs; target zones; time series; trade balance; unemployment; verification measures; volatility; wages; Iceland
• Online Access: http://hdl.handle.net/10986/21405

Credibility and transparency are at the core of the current debate about exchange rate regimes. The steady growth in the magnitude and variability of international capital flows has complicated the question of whether to use floating, fixed, or intermediate exchange rate regimes. Emerging market economies are abandoning basket pegs, crawling pegs, bands, adjustable pegs, and various combinations of these. One of several reasons intermediate regimes have fallen out of favor is that they are not transparent; it is very difficult to verify them. Verifiability is a concrete example of the principle of "transparency" so often invoked in discussions of the new international financial architecture but so seldom made precise. A simple peg or a simple float may be easier for market participants to verify than a more complicated intermediate regime. The authors investigate how difficult it is for investors to verify from observable data whether the authorities are in fact following the exchange rate regime they claim to be following. Of the various intermediate regimes, they focus on basket pegs with bands. Statistically, it can take a surprisingly long span of data for an econometrician or investor to verify whether such a regime is actually in operation. The authors find that verification becomes more difficult as the regime's bands widen or more currencies enter the basket peg. At the other extreme, they also analyze regimes described as the regime's bands widen or more currencies enter the basket peg. At the other extreme, they also analyze regimes described as free floating and find that in some cases the observed exchange rate data do validate the announced regime.