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|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|5195||2007||11 صفحه PDF||سفارش دهید||5428 کلمه|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Emerging Markets Review, Volume 8, Issue 4, December 2007, Pages 328–338
This paper explores the impact of exchange rate pegs on the fiscal stance of emerging markets during the nineties. We empirically show that announcing the pegs had deleterious effects on fiscal discipline, while ‘de facto’ pegs which were not announced delivered superior fiscal outcomes. The evidence suggests that this was due to the initial positive credibility shock of the announcement, which allowed for easier and less costly access to the financing of fiscal deficits in emerging countries.
Economic developments in emerging markets in the last 15 years have been characterized by the ebb and flow of capital flows in a period of financial liberalization. Their exponential growth in the first part of the nineties, in a context of high global liquidity, allowed for a period of high and robust growth. When the flows reversed in the second half of the nineties, a series of financial crises ensued, bringing havoc to many of these economies. The choice of exchange rate regime in emerging economies at that time was, in one way or other, closely related to the process of financial liberalization and access to the global supply of funds. Two cases stand out. In Asia, the outward oriented growth strategy implied – and still implies – a close, although not always declared, management of exchange rates that kept competitiveness high in spite of the upward pressure that capital inflows imposed on exchange rates. In Latin America, where recent history had made external financing hardly available and credibility was lacking, explicitly fixing the exchange rate became the cornerstone of the stabilization and reform programs setup in the aftermath of the ‘lost decade’ of the eighties. Fixing the exchange rate was believed to foster not only monetary but also fiscal responsibility. By pegging the exchange rate, the monetary creation process is constrained, monetary financing of deficits becomes impossible and, in response, governments would be forced to discipline their fiscal decisions. However, empirical evidence of the positive impact of rigid exchange rate regimes on fiscal discipline has proven elusive. Using the IMF standard classification of exchange rate regimes, the first column in Table 1 shows that those emerging economies which limited the flexibility of their exchange rate during the nineties (whether through strict pegs or some other intermediate arrangement) displayed higher primary balances on average, but the difference relative to floating regimes was not statistically significant. Moreover, the average primary surplus under intermediate regimes was slightly lower than under floating regimes. Ghosh et al. (2003) sum up the empirical evidence concluding that “[...] greater monetary discipline does not translate into fiscal discipline”. Gavin and Perotti (1997), Tornell and Velasco (1998) and Calvo and Vegh (1998) have also concluded that pegs do not provide higher fiscal discipline in emerging economies. These results are highly suggestive because insufficient fiscal discipline under pegged regimes may lie at the root of several recent crises in emerging markets. Ghosh et al. (2003) find that, for their sample of exchange rate based stabilization programs, profligate fiscal policy seems to be the most likely predictor of failure. Previous efforts in explaining the irrelevance of exchange arrangements on fiscal policy have considered the possibility that the loss of seignorage associated to fixed exchange rates could lie behind these results. Since fiscal deficit figures include seignorage revenue, comparing low seignorage pegs to high seignorage floats may be biasing the results. However, Alberola and Molina (2003) arrive at similar conclusions after controlling for seignorage effects in the analysis. In this paper, we explore a different venue. The reason why previous studies have failed to find an impact of exchange arrangements on fiscal policy is their use of the IMF's de jure classification of exchange rate policies. Using Reinhart and Rogoff (2004) de facto classification, we document statistically significant differences in fiscal policy outcomes across their taxonomy of exchange rate arrangements. We claim in this paper that the explanation for the apparent inconsistency between the results obtained using de jure and de facto classifications lies in the deleterious effect of peg announcements on fiscal discipline. We provide a rationale for why this is the case, based on the interaction of financial market integration and the initial credibility afforded by such announcements. The problem of inconsistency between what the countries really do and what they declare at the IMF has become increasingly relevant. In particular, in a period where many countries abandoned their external anchors and declared their currencies to be floating, the “fear of floating” phenomenon documented in Calvo and Reinhart (2002) has become a major focus of analysis. There have been efforts to overcome the limitations of the IMF's approach by focusing on the effective behaviour of the exchange rate, among others by Reinhart and Rogoff (2004) (RR, henceforth), whose classification we describe in more detail in section 2. The use of this and similar classifications has led to a profound reassessment of the implications of exchange rates arrangements on growth, inflation, etc. Fiscal policy seems to be a case where this reassessment is due. The second column of Table 1 shows that countries with ‘de facto’ pegs displayed a significantly higher degree of fiscal discipline (relative to floating regimes), a contradiction to the standard finding in empirical research in this area. The importance of financial integration and its effects over the effective discipline imposed by pegs was generally overlooked in some of the analysis of the benefits of fixed arrangements at the beginning of the nineties. As mentioned above, the conventional theory was based on a rather limited framework, as it only took into account the mechanical effect of the constraints on monetary creation, rather than the actual ultimate goal of many exchange rate pegs, which was to import credibility by tying authorities' hands. The credibility gains due to the peg, however, usually enabled easier and cheaper access to financial markets and thus better conditions to finance domestic spending, both private and public. This easier access to financial markets may have reduced the incentives of governments to maintain a prudent fiscal stance. Furthermore, it is well known that exchange rate based stabilizations led to an increase in domestic demand—the ‘boom’ leg of the boom-bust cycle that has been emphasized by the literature (see Calvo and Vegh, 1998). Typically, higher public spending was financed by increasing revenues arising from the boom. In those instances where the increase in public expenditure exceeded the final realization of revenues, as was often the case, fiscal discipline was additionally eroded. Both arguments call for an explicit consideration of the effects of financing conditions and economic activity associated to the peg in the empirical analysis. The compounded impact of these effects of the peg, by loosening the authorities' fiscal constraint, may more than offset the monetary channel in terms of fiscal rectitude. The previous discussion suggests that the way credibility is achieved may matter for the fiscal impact of exchange regime choice. In the long run, it is obvious that only when the peg is consistent with the underlying policies it will be credible and thus sustainable. In other words, getting the fiscal balance under control in a sustained way is most important for a successful peg. Using the terminology by Levy-Yeyati and Sturzenegger (2005) deeds are in the end much more relevant than words. This is the idea behind Krugman (1979) first generation of balance of payments models, in which precisely time-inconsistent fiscal laxity of the government precipitated the attack on the currency. But this is not necessarily the case in the short run. At their inception, pegs may enjoy some credibility, so as to induce a ‘honeymoon effect’ (as labelled by Krugman (1991) in the context of exchange rate target zones) derived from their announcement. To the extent that governments commit their word on the announcements, it is quite probable that just by announcing the peg there is an initial positive credibility shock, mostly when the announcement is also backed by complementary economic measures (e.g. stabilization plans, like those set up in Latin America in the late eighties and beginning of the nineties). This honeymoon effect does not necessarily imply that investors are not rational, since many factors (rational speculation, implicit exchange rate insurance or a positive probability of multilateral rescue packages, for example) would tend to make investors willing to lend, at least in the short term, to a government which announces the peg, even if they are not fully convinced on the fundamental economic behaviour – including fiscal discipline – which would render the peg indefinitely sustainable. As a matter of fact, the so-called “original sin” phenomenon (Eichengreen and Hausmann, 1999), whereby investing in emerging markets is largely limited to short-term, and/or in foreign currency debt, is seen as consistent with an underlying long-run skepticism. Therefore, at least in an initial phase, both words and deeds matter since they may allow to reduce financing costs. This easier access to financing, we argue, lowers the incentives for fiscal discipline. We thus hypothesize that announced pegs enjoy higher credibility gains upfront, resulting in more loose financial constrains leading to lower fiscal discipline. The aim of this paper is therefore to test this hypothesis and whether it can account for the missing effect of exchange rate arrangements on fiscal policy. To do so, from the RR data set we build a new taxonomy of exchange rates regimes which takes into account both their degree of flexibility and whether they are announced or not. Our results back our hypothesis quite strongly: peg announcements seem to have had a deleterious effect on emerging markets' fiscal discipline, derived from their impact on financial conditions and growth. This section is followed by a brief description of the definitions and sources of the data employed in the analysis. Section 3 describes and discusses the empirical approach. Section 4 presents the main results of the paper and is divided in three sub-sections where we show evidence regarding the relevance of fiscal constraints for policy decisions, the differences between announced and non-announced regimes and the impact of rigidity once other factors are controlled for. The last section recaps and briefly elaborates on some implications of our findings for the current situation in emerging markets.
نتیجه گیری انگلیسی
In this paper, we have pursued an explanation to the widely documented failure of pegs to induce more fiscal discipline in emerging markets. Our strategy has followed two different, albeit complementary, venues. The first venue has been mainly methodological: exchange rate classifications matter to ascertain the effect of regimes on fiscal discipline. The traditional finding of irrelevance of exchange rate arrangements on fiscal policy can be accounted by the failure to discriminate in the analysis between announced and non-announced exchange rate arrangements. When using the traditional ‘de jure’ classification exchange rate pegs are shown not to provide fiscal discipline and this is a robust result. However, when reconstructing the classification to account for the actual behaviour of the exchange rate regimes the result is reversed. The divergence among both classifications suggests that what dilutes fiscal discipline is announcing the exchange regime. This line of thought points to the importance of credibility and stresses expectation effects of regime announcements in eroding fiscal discipline. In particular, we argue that credibility which is achieved by simply announcing the regime and not based on a track record of consistent policies tends to dilute fiscal discipline. Why? Because this positive credibility effect softens the budget constraint of the fiscal authorities. Our results confirm that this channel was very relevant in emerging markets which observed their access to external financial markets grow exponentially since the late eighties. For these countries, the reduction in the cost of financing deficits arising from announcing the regime diluted the pressures for fiscal discipline, and weakened fiscal efforts by the authorities which, in turn, may have been the basis of the failure of some notorious “hard pegs” as Argentina. Going forward, it remains to be seen whether the effects described in this paper are maintained in the aftermath of the crisis experienced by several emerging markets starting in the late nineties. The abandonment of convertibility in Argentina, in particular, may have served as a turning point for markets' future evaluation of exchange rate arrangements and its relationship with fiscal fundamentals.