# مدت نرخ ارز ثابت رژیم اقتصادهای در حال ظهور

کد مقاله | سال انتشار | مقاله انگلیسی | ترجمه فارسی | تعداد کلمات |
---|---|---|---|---|

9272 | 2013 | 46 صفحه PDF | سفارش دهید | 17770 کلمه |

**Publisher :** Elsevier - Science Direct (الزویر - ساینس دایرکت)

**Journal :** Journal of International Money and Finance, Available online 11 July 2013

#### چکیده انگلیسی

This paper examines the duration of fixed exchange rate regimes and investigates whether there is a certain pattern of time dependence in the survival rate of pegged exchange rate regimes for emerging economies. We query why some fixed regimes last longer and determine the macroeconomic, social and political factors that make a pegged regime more durable. We use survival analysis, a technique which accounts for the unobservable cumulative effects associated with maintaining a fixed exchange rate that build up over the duration of a regime. In our model, time enters as a proxy for these unobserved persistent effects as we investigate the relative importance of the fundamentals in the economy on regime durability by considering their relation together with the effect of time itself. Using the de facto exchange rate regime classification proposed by Reinhart and Rogoff (2004), we find non-monotonic duration dependence and show that time is a significant factor for the duration of pegged regimes. Openness, changes in foreign reserves, growth, real exchange rate misalignment, claims on government and sociopolitical instability are also found to influence the pegged regime duration.

#### مقدمه انگلیسی

Exchange rate regime choice is one of the most important policy issues in international finance. A vast literature analyzes the advantages and disadvantages of one exchange rate arrangement over another, and whether exchange rate regime choice matters.1 However, when it comes to choosing the best exchange rate regime there still is no one size fits all answer and exchange rate regime choice remains a central question (Frankel 1999). Since the collapse of the Bretton Woods System of Fixed Exchange Rate Regimes, countries have tried various exchange rate arrangements. Whether a voluntary decision of a regime change or an inevitable result of external factors which make the regime unsustainable over time, there have been many switches between fixed and floating regimes over the past couple of decades. Since 1970 emerging countries on average have experienced the highest number of regime switches. They have made many attempts to adopt a fixed exchange rate regime, mostly either to import credibility, fight inflation, or encourage trade. However, in many cases the exits from fixed exchange rate regimes have been dismal with large output losses following currency crises.2 The international financial crisis in the 1990s in Latin American and the East Asian crises have started a debate about the sustainability of fixed exchange rate regimes. Contrary to the view that intermediate regimes are vanishing, today about 40 percent of emerging countries have intermediate regimes. Together with harder peg regimes about 70 percent of the regimes in the emerging economies have some sort of a fixed regime. This high percentage shows that fixed exchange rate arrangements still prevail for emerging economies. One striking example of fixed exchange rate regimes is that of China, which has been operating under an officially pegged exchange rate system where the value of the Renminbi is controlled by the Chinese Central Bank since 1994. The Chinese exchange rate policy has been a source of controversy and intense debate in recent years. While the continuation of the policy is in the hands of the Chinese authorities, the interaction of economic considerations, international politics, and constituent interest will play a role in the final decision. While China poses a success story for fixed exchange rates, the sustainability of fixed exchange rate regimes is still questionable and emerging economies still face the decision of whether to float or fix. In this study, we consider fixed exchange rate regimes from a different angle by analyzing regime sustainability and the factors that affect regime duration (defined as the time that a particular regime has been in place). Considering the failure of many fixed regimes in the 1980s and 1990s and the success of countries like China and Hong Kong we question the factors that affect the continuation of pegged regimes. Specifically what are the characteristics that make a pegged regime durable over time or cause its collapse? Sustainability of the regime affects not only the regime choice initially, but also the subsequent economic outcomes. Husain et al. (2005) find that regime durability is associated with superior economic performance. Aizenman and Glick (2008), on the other hand, show that the cost of an exit from a peg increases with the duration of the peg before the crisis. In this regard, the factors that lead to the sustainability of the regime are an important consideration. However, despite this importance, few studies analyze the duration of exchange rate regimes or address questions of what factors play a role in the sustainability of a regime. This paper intends to shed light on the sustainability of fixed exchange rate regimes for emerging market economies. Besides the basic question of why some fixed exchange rates last longer and the determination of the factors that make a pegged regime more durable, an important point we address and that has often been neglected in the literature is whether the duration of the regime is itself a significant factor influencing its collapse. Country characteristics, external financial conditions, and macroeconomic factors are important candidates that affect regime duration. Specifically some macroeconomic indicators such as deterioration in the current account or a large amount of foreign borrowing may force the country to abandon a fixed exchange rate regime towards more flexible arrangements. However, besides such fundamentals some unobservable cumulative effects associated with maintaining a fixed exchange rate regime may be in play. These unobservable characteristics may not affect survival initially, or may not be critical at a specific time point, but can cumulate over time and eventually cause a fundamental imbalance that affects sustainability. Regime credibility is one such factor that is hard to measure, that varies over the lifetime of the regime, and may have significant effect over regime duration. The existence of such unobservable factors poses a challenge in modeling regime duration. Any analysis that does not consider them as a separate covariate would be biased. Since these persistent effects build up over time, their effect should be proportional to the time the regime has been effective. Time, specifically regime duration, can be used to account for these unobserved factors. Thus, in our analysis we measure the effects of economic, social, and political factors on regime durability by considering their relation together with the effect of time itself. Time within a particular exchange rate regime could be important for eventually undermining the regime’s stability for several reasons. As Husain et al. (2003) point out, regimes that last longer presumably do so because macroeconomic policies are maintained in a consistent manner over time. In that regard, the regime’s duration can be seen as a proxy for the consistency of the macroeconomic stance with respect to the exchange rate regime. If consistency is a factor that increases the sustainability of the regime, long lasting regimes should be associated with higher survival rates. On the other hand, Drazen and Masson (1994) show that there may be some persistent effects, associated with maintaining an announced policy over time, which may reduce the likelihood to carry the announced policy further. The longer a pegged regime has been effective, the more will be the accumulation of these persistent effects, so that it becomes harder to sustain the regime. In such a setting, long lasting regimes should increase the probability of abandoning the regime, and we should expect a negative association between the time the regime has been effective and the subsequent foreseen duration. In our analysis, besides determining the factors that affect regime duration, we test the significance of these unobservable cumulative effects by analyzing duration dependence. In particular, we test whether there is a certain time dependence of the durability of fixed exchange rate regimes; i.e. whether the time spent on the regime, after controlling for explanatory variables, plays a significant role for the continuation of the regime. The specific nature of time makes it problematic to use standard regression techniques to estimate the effect of time and some other time varying covariates on the duration of exchange rate regimes. We account for this problem using a specific technique, namely survival analysis whose strength lies in the explicit modeling of time-dependence, along with the inclusion of explanatory variables that change over time.3 Every model in survival analysis assigns a role to time. By doing so, time is used as a proxy for the effects that cannot be fully understood, cannot be measured, or are unknown (Cleves et al., 2008). In our analysis, time enters as a proxy for unobserved regime characteristics that affect regime durability over time. Survival analysis allows us to jointly look at the underlying factors that affect regime durability and the time the regime has been effective. Using survival analysis we test to what extend the regime duration depends on the fundamentals in the economy and how regime sustainability evolves after accounting for explanatory factors that affect regime duration. We first analyze how the survival experience differs across economies, and whether there is certain duration dependence in the survival rate. The Reinhart and Rogoff (2004) de facto exchange rate classification is used to analyze the exchange rate regime duration of different countries. Then we model the pegged regime sustainability for emerging economies using economic and financial variables via a Cox (1972) proportional hazards estimate. Our analysis reveals the existence of non-monotone duration dependence for emerging economies in which the sustainability of a pegged regime initially decreases and then increases by time.4 We start with a literature review in Section 2, and follow with a discussion on the different exchange rate regime classifications in Section 3. Following the analysis of exchange rate regime duration in section 4, there is a methodological discussion on survival analysis in Section 5 and a discussion of the explanatory variables in Section 6. After the estimation results in Section 7, the paper concludes in Section 8.

#### نتیجه گیری انگلیسی

The choice of the exchange rate regime is an important policy decision facing emerging economies. Despite frequent collapses, many emerging economies continue to follow some sort of a de facto fixed exchange rate regime. Regime switches between fixed and floating regimes are common, and there are few emerging economies that have managed to maintain a fixed regime for more than 10 years. The expected duration of pegged regimes and the factors that affect their sustainability is still a central question for economists and policy makers. Is this low regime persistence a result of macroeconomic and financial conditions, or is there a certain time dependence that makes fixed regimes less durable over time. Specifically, what are the factors that affect regime durability? One problem in measuring the effect of the fundamentals on regime duration is the possibility of some unobservable cumulative effects associated with maintaining a fixed regime that build up over the regime duration. These are the effects for which there is no direct measure, but their impact affects regime sustainability. Example of such an effect is the buildup of a regime’s credibility. In such a case the expectation would be for a regime to become more sustainable the longer it has been effective. However, it is also possible that some negative factors that affect the continuation of the regime adversely will build up over time and make the regime less sustainable. The effect of such unobservable persistent effects has not been studied in the literature before. If such unobservable effects were present, any analysis that does not consider them would be biased. We overcome this problem by using a specific technique, survival analysis, which allows for explicit modeling of time dependence, and the inclusion of explanatory variables that change over time. In our analysis, time enters as a proxy for the unobserved cumulating effects that affect regime duration. This allows us to investigate the relative importance of the factors on regime durability by considering their relation together with the effect of time itself. Using a large sample of countries, we have shown that the survival experience of pegged regimes differs across economies, and that emerging economies have the highest hazard rate compared to other country groups. The hazard rate of the emerging economies is also the most volatile, suggesting that time plays a more important role in the sustainability of pegged regimes in these economies. In addition, we estimate the hazard rate using a Semi-parametric Cox model with time varying covariates. The model gives us an estimate of sustainability as a function of macroeconomic and financial variables, and as a function of the duration of the pegged regime itself. The results show that misalignment in the exchange rate, an increase in liability dollarization and claims on the government reduce the lifetime of a pegged regime. On the other hand, economic growth, an increase in foreign reserves, improvement in the current account and a strong foreign asset position increase regime duration. Open economies have a lower hazard rate, suggesting that the cost of abandoning the peg is higher for open economies. Another important finding is that capital controls are not effective in increasing regime duration. Among the socio-political factors of regime duration, we find that the probability of an exit from a fixed regime is less likely under social conflict and autocratic regimes. Electoral cycles and government ideology are not found to have a significant effect on regime duration. Regime change is more likely in presidential than in an assembly elected president and than in a parliamentary system. We also find that the likelihood exit from a pegged regime increases with central bank independence, supporting the argument that central bank independence and fixed regimes are exercised as alternative monetary commitments. Even after controlling for macroeconomic and socio-political factors, emerging economies exhibit non-monotonic duration dependence, where the probability of abandoning the pegged regime increases initially and then declines. This suggests that time, which captures the cumulating unobservable effects, is an important factor for the regime duration, and also explains why few countries manage to sustain a pegged regime for more than a decade. An extension of the analysis for future work would be to explore the survival experience for a finer classification of intermediate regimes, and analyze how the degree of flexibility affects regime duration. It would also be interesting to look at regime duration for alternative de facto classification measures of exchange rate regimes, specifically, those that do not allow one-time devaluations within the same regime. So far, the literature has focused on the external factors of regime duration. However, this paper has presented that policy makers also need to consider the time dependence of regime duration. Knowledge of the circumstances that make the regime unsustainable can work as early warning signals for authorities who want to maintain a pegged regime or guide them on the timing of a regime change and when to follow tough policies. Our findings suggests that pegged regimes that have survived more than 10 years , such as that of Hong Kong, have passed the threshold point and, unless there are unfavorable changes in the macroeconomic and financial environment, the regime will become even more durable as time goes by.