ارزهیئت مدیره ، بدهی دلاری، و اعتبار سیاست های پولی

The recent collapse of the Argentine currency board raises new questions about the desirability of formal fixed exchange rate regimes. This paper examines the relative performance of a currency board with costly abandonment in the presence of dollarized liabilities to a fully-discretionary regime. Our results demonstrate that neither regime necessarily dominates with only idiosyncratic firm shocks, but discretion unambiguously dominates with the addition of shocks to the dollar-euro rate. The relatively strong performance of the discretionary regime in this model stems from the benign impact of dollarized liabilities on the monetary authority’s time-inconsistency problem.

The recent collapse of the Argentine currency board has resulted in renewed attention on this form of exchange rate regime. Prior to this event, many had argued that “intermediate” exchange rate regimes had fallen out of favor (e.g. Frankel et al., 2001), with pure floats or hard pegs, such as formal currency board arrangements, dominating them in terms of economic performance. The dramatic collapse of the Argentine economy raises new questions about the desirability of currency boards in modern developing economies. The historical evidence on the empirical performance of currency boards suggest that they do have a disciplinary effect on policy and have tended to be successful. Ghosh et al. (2000) report that exits from currency boards have been very rare.1 Moreover, currency board countries exhibit lower inflation, lower fiscal deficits, and lower average rates of monetary growth. While exits from currency boards are rare, pegged exchange rate regime collapses are not. The prevalent pattern observed in the literature is that when fixed exchange rate regimes do collapse, their collapses tend to be “…messy and costly” (Edwards, 2002). For example, Edwards and Edwards (1987) report that Chilean GNP fell by 19 percent in 1982 subsequent to its devaluation, after accounting for terms of trade changes. Downturns of this magnitude are not uncommon following exchange rate collapses. Given the experience with pegged regime collapses, it appears likely that when currency board collapses do occur, they would be even more disruptive. The historical record of currency board safety is likely to induce agents to feel free to denominate contracts in local and hard currencies interchangeably, leaving widespread potential for currency mismatches in the wake of a currency board collapse. That of course has been the experience with Argentina. From 1999 through 2002, GDP per capita in Argentina fell by over 50 percent while unemployment rose to 23 percent. One notable feature of Argentina’s collapse is the contribution of weakness in its financial sector. De la Torre et al. (2003) note that while Argentina’s currency board led to increased financial deepening in that country, it did so at the expense of greater financial fragility. Because a currency board left open the opportunity to devalue at some cost, it left Argentina exposed to expectations of devaluations and “sudden stops” in capital inflows. These sudden stops led to widespread disintermediation and financial turmoil. Subsequent to devaluation, problems were particularly acute among agents facing dollar-denominated liabilities. A number of recent papers (e.g. Calvo and Reinhart, 2002 and Aghion et al., 2001) have argued that using an exchange rate devaluation to respond to an adverse shock can be counterproductive in the presence of dollarized liabilities. While devaluations can have a positive impact on export performance, they may also have an adverse impact on domestic balance sheet positions. These adverse balance sheet effects may then exacerbate economic downturns if production is dependent on external funds, as in Edwards and Vegh (1997). There is ample empirical evidence that the dollarization of liabilities in the financial sector has exacerbated the adverse effect of devaluations. For example, Edwards and Edwards (1987) argue that Chile’s financial liberalization prior to the 1982 crisis encouraged its financial conglomerates to increase their dependence on foreign dollar-denominated liabilities. The result was widespread bankruptcy subsequent to the 1982 devaluation. Much of the recent theoretical work comparing exchange rate regimes has centered on examining the impact of dollarized liabilities in macro models with explicit financial channels. Caballero and Krishnamurthy (2001) examine a model where private agents hold sub-optimal levels of hard assets, as they underestimate the true social value of hard assets in the future. Chang and Velasco (2000) and Céspedes et al. (2001) examine models in which banks are exposed to runs under a variety of different exchange rate regimes. Their analysis tends to favor flexible exchange rate regimes over pegged regimes, but plausible conditions also exist that favor the fixed regimes. In this paper, we examine the relative performance of a currency board in the presence of a banking sector with dollarized liabilities. We introduce a three-period model in which firms must borrow externally to finance their investments. To set up the balance sheet problem, we assume that while liabilities are in dollars, firm output is valued in pesos. Moreover, we assume that the value of firm assets and liabilities move in opposite directions as a result of an exchange rate change. In the event of a devaluation, output values increase in pesos, but decrease in dollars. We compare the performance of a currency board to a full discretionary regime in two environments: First, we allow the firms to face only idiosyncratic shocks to firm value. In this case, standard debt contracts can be motivated in terms of a Townsend (1979) model of borrowing with monitoring costs. Second, we also allow for the presence of an aggregate shock. To highlight the question of the merits of a currency board, we specify the shock as being to the hard currency exchange rate. Again, assuming that liabilities are denominated in dollars and output is denominated in pesos, we take the euro as the numeraire of world value. We can then examine the implications of a shock to the dollar-euro exchange rate. Our results for the idiosyncratic risk only model suggest that the relative desirability of a currency board is ambiguous and dependent on the relative weight the central bank places on consumption and inflation. For low consumption weights, the discretion regime generally dominates, although the difference appears to be small. However, for high consumption weights, the currency board dominates. The discretion regime’s dominance in terms of the central bank loss function increases when we allow for foreign exchange rate shocks. In the presence of foreign exchange shocks, the discretion model is expected to dominate for all relative consumption weights in our simulations. This discrepancy represents the added value of adjustment in an environment that includes aggregate shocks. In particular, we find that the dominance of the discretion model over the currency board is greatest when the first-period realization of the dollar is high. Given this high realization, our numerical solution shows that under discretion the central bank chooses to smooth the first-period consumption effects of the dollar appreciation by letting the value of the domestic currency depreciate. This channel is of course unavailable within the currency board regime. The relatively strong performance of the discretion regime over the currency board is is driven in part by the fact that the central bank under discretion considers the impact of exchange rate devaluations on balance sheet positions when making its policy decisions. Dollarized liabilities mitigate the central bank’s time-inconsistency problem, much like the accumulation of debt in the corporate finance literature can mitigate agency problems between corporate managers and their shareholders (e. g. Jensen, 1986).2 These results follow Drazen and Masson (1994), who demonstrate that monetary policy can affect persistent fundamentals, and thereby affect future outcomes. In our model, the fundamental carried over into period 2 is the country’s debt burden. This is higher under discretion, and leads the central bank to choose less depreciation than it would under the currency board in that period. The remainder of this paper is divided into five sections. Section 2 sets up the model with idiosyncratic shocks only. The equilibrium of this model is discussed and numerically solved in Section 3. Section 4 introduces shocks to the dollar-euro rate into this model and numerically solves for the equilibrium. Section 5 concludes.

This paper examines the relative desirability of a currency board in the presence of dollarized liabilities and the possibility of firm default. In our model, dollarized liabilities positively impact the time-consistency problem faced by the monetary authority by increasing the cost of devaluations. The presence of dollarized liabilities would therefore be expected to reduce the relative desirability of a currency board. Our numerical results show that for our parameterization with only idiosyncratic shocks, the relative dominance of a currency board is ambiguous. However, with the introduction of shocks to the dollar-euro rate, the discretion regime unambiguously dominates in terms of the central bank loss function. This latter result was somewhat surprising because the risk premium faced by firms under discretion was almost universally higher. Some caveats to our results should be noted. First, while dollarization performs a positive role in our model by reducing the time-inconsistency problem faced by the central bank, it is clear that dollarization is perceived to pose a variety of difficulties empirically. This discrepancy may in part stem from features in developing country economies that are not captured in our model. For example, our model does not exhibit the large discrete devaluations with overshooting that often appear to accompany the abandonment of an exchange rate peg. In the presence of overshooting, the potential difficulties raised by the necessity of denominating a nation’s liabilities in hard currency are likely to be increased. A related issue concerns the severity of the time-inconsistency problem in our numerical results. As we limit ourselves to parameter values consistent with both solution of the model and maintenance of the separating equilibrium, the absolute levels of devaluation chosen in the paper appear to be relatively modest. This implies that the time-inconsistency problems considered in our numerical solutions may not be as severe as those experienced by central banks with very low credibility. Allowing for severe time-inconsistency problems could further favor the currency board. Finally, given that currency board abandonment might take place, the question of the optimal timing of such abandonment naturally arises, and clearly affects the relative desirability of adopting a currency board. That question is unaddressed in our model, as the central bank only considers abandoning the currency board in the first period. However, such a question could be addressed in a more stationary environment, such as that used by Rebelo and Vegh (2003) to examine the optimal timing of abandoning an exchange rate peg. We leave this question for future research.