طبقه بندی رژیمهای نرخ ارز: اسناد در مقابل کلمات

Most of the empirical literature on exchange rate regimes uses the IMF de jure classification based on the regime announced by the governments, despite the recognized inconsistencies between reported and actual policies in many cases. To address this problem, we construct a de facto classification based on data on exchange rates and international reserves from all IMF-reporting countries over the period 1974–2000, which we believe provides a meaningful alternative for future empirical work on the topic. The classification sheds new light on several stylized facts previously reported in the literature. In particular, we find that the de facto pegs have remained stable throughout the last decade, although an increasing number of them shy away from an explicit commitment to a fixed regime (“hidden pegs”). We confirm the hollowing out hypothesis but show that it does not apply to countries with limited access to capital markets. We also find that pure floats are associated with only relatively minor nominal exchange rate volatility and that the recent increase in the number of de jure floats goes hand in hand with an increase in the number of de facto dirty floats (“fear of floating”).

The analysis of the implications of alternative exchange rate regimes is arguably one of the most important questions in international economics. However, our knowledge of this issue from a theoretical point of view, which comprises an extensive literature starting with Mundell's (1961) theory of optimal currency areas, contrasts with the relatively weak empirical findings linking exchange rate regimes with macroeconomic performance. One potential explanation for this weakness relates to the way in which countries are grouped according to their exchange rate arrangements. Most of the empirical discussion on exchange rate regimes has used the de jure (legal) regime as compiled by the IMF, which is based on the regime the country declares to be running.1 However, many countries that in theory have a flexible rate intervene in exchange markets so pervasively that in practice very little difference exists (in terms of observable performance) with countries that have explicit fixed exchange rate regimes. Conversely, periodic devaluations of pegs in inflation-prone countries are the result of the implementation of monetary policies that are inconsistent with fixed exchange rates and that make the effective regime resemble a flexible arrangement.2 Moreover, countries that appear to behave according to the declared regime during tranquil times may be tempted to change their course of action once the regime is under stress. Thus, a very different picture of exchange rate regime choices may appear once the international context becomes more volatile.3 In this paper, we address these problems by proposing a new de facto classification of exchange rate regimes that reflects actual rather than announced policies, which we believe provides an alternative as well as a complement to the standard de jure approach.4 More precisely, we define exchange rate regimes according to the behavior of three classification variables: changes in the nominal exchange rate, the volatility of these changes, and the volatility of international reserves. Underlying the selection of these variables is a textbook definition of exchange rate regimes, where fixed exchange rate regimes are associated with changes in international reserves aimed at reducing the volatility in the nominal exchange rate, and flexible regimes are characterized by substantial volatility in nominal rates with relatively stable reserves. Thus, the combined behavior of these three classification variables should be sufficient to determine the regime to which each country should be assigned at any point in time. To construct the classification we use a cluster analysis methodology that, once the number of exchange rate regimes to be identified from the data is defined, groups the cases according to similarity in the behavior of the three variables of reference. For example, the cluster with high volatility of reserves and low volatility in the nominal exchange rate identifies the group of fixers. Conversely, the cluster with low volatility in international reserves and substantial volatility in the nominal exchange rate corresponds to countries with flexible arrangements. The procedure allows us to classify most country-years since 1974. In addition, we extend the classification to include cases for which data on some of the classification variables are not available but may still be classified in an uncontroversial manner, either because the country did not have a separate legal tender (e.g., Panama) or because the de jure regime was readily verifiable (e.g., Hong Kong). To illustrate the differences between the de jure and de facto classifications, we address three stylized facts related to exchange rate regimes recently highlighted by the literature. First, there is consensus that there has been an increase in the use of floats throughout the post-Bretton Woods period. Second, that intermediate regimes (including conventional pegs) are inherently vulnerable to capital flows and thus bound to disappear in a world with increasingly integrated capital markets, a fact dubbed by Eichengreen (1994) as “hollowing-out hypothesis” and by Fischer (2001) as the “bipolar view”.5 Third, that many countries that claim to float do not allow their nominal exchange rate to move freely, a pattern that Calvo and Reinhart (2000) have referred to as “fear of floating”. All of these three facts are in principle partially supported by the evidence. A glance at exchange rate regimes as classified by the IMF shows a substantial decline in the number of fixers relative to floats. In fact, in a study on exchange rate regimes for developing countries, IMF (1997) reports that the number of pegs dropped from 86 in 1976 to 45 in 1996, while flexible exchange rate arrangements increased from 11 to 52 over the same period.6Eichengreen's (1994) hollowing-out hypothesis seemed to be confirmed by the collapse of pegs in South East Asia and Latin America, the swift move to monetary integration in Europe in the aftermath of the EMS crisis of 1992, and the recent adoption of the U.S. dollar as legal tender in Ecuador and El Salvador. Finally, Calvo and Reinhart (2000) show that exchange rate and foreign reserves volatility for many alleged floats differ significantly (indicating sizable stabilizing intervention) from that corresponding to undisputed floats.7 When we revisit the aforementioned “stylized facts” in light of our de facto classification, we find somewhat different results. First, while there has been a decline in the number of fixers in the first two decades after the demise of Bretton Woods, the use of fixed rates appears to have been relatively stable during the 90s, in contrast with what can be inferred from the IMF classification. In fact, this comparison reveals that during the 90s many countries that in practice behave as fixers declare a more flexible regime, possibly in an attempt to reduce the exposure to speculative attacks associated with explicit commitments. We label this phenomenon as “hidden pegs”. Second, we find evidence supporting the claim that intermediate regimes such as conventional and crawling pegs have become increasingly uncommon. However, in contrast to the de jure approach, the de facto classification reveals that the hollowing-out hypothesis does not hold for non-emerging non-industrial countries, confirming that exposure to strong capital flows may be necessary for the pattern to develop, in line with the bipolar view argument. Third, we find that de facto floats are associated with only small exchange rate variability and that among the countries that claim to float, a large number intervene recurrently to stabilize their exchange rates, providing support for Calvo and Reinhart's “fear of floating” hypothesis. Interestingly, contrary to what is usually assumed, fear of floating appears to be a relatively common phenomenon dating back to the early 70s. The paper proceeds as follows. In Section 2, we discuss in detail the methodology and present a first glance at the new classification. In Section 3, we compare it with the standard de jure classification obtained from the IMF, and revisit the main stylized facts discussed above. Section 4 discusses some potential caveats and concludes. In Appendix C we report the classification of exchange rate regimes.

Several researches have acknowledged the inadequacy of the de jure classification. As Fischer (2001) concisely states: ... authorities own descriptions of exchange rate regimes in Exchange Arrangements and Exchange Restrictions is patently inaccurate for some countries... Aware of this problem, Frieden et al. (2001) and Ghosh et al. (1997), to cite two recent examples, have used adjustments to the de jure classification in their work on exchange rate regimes. We believe that our classification provides an improvement relative to these partial exercises. First, our approach is less arbitrary as our only classification input is the number of clusters to be identified. Second, our classification balances outcome and policy variables, evaluating whether policy variables are effectively used to generate a certain result in terms of outcome variables. Third we provide a comprehensive database readily available for future empirical work. Fourth, the classification provides a very realistic assessment of exchange rate regimes. Finally, it also contains more information than previous classifications by providing a distinction between first and second round which allows to discriminate, albeit in a crude manner, the intensity of the shocks to which the regime is subject, something that qualitative indexes previously used did not allow. More in general, the intensity dimension should help avoid a bias towards the irrelevance hypothesis, particularly likely if the effect of the regime on other variables is significant only at high volatility levels. However, a classification as the one proposed in this paper is bound to have some, arguably minor, caveats. The role of sterilized intervention, the potential use of capital control restrictions, dual exchange rates, financial sector intervention, third party exchange rate intervention are potential criticisms. However the building of a useful classification requires using feasible information. Interest rate data, for example, is usually of poor quality and unavailable for a large set of countries. For example, Eichengreen et al. (1996) develop an index of speculative pressures, but data requirements allow them to compute this index for just 23 countries. When Edwards (2002) attempts to extend this to a large sample of countries he is forced to drop the interest rate from the analysis. The objective of building a classification purely based on policy variables or policy instruments is another potential criticism. However, this introduces the problem of the endogeneity of exchange rate regimes. For example, countries with high pass-through coefficients and an inflation objective are likely to prefer a stable exchange rate, even though the exchange rate is not the final target. Whether or not we choose to associate this behavior with fixed exchange rate regimes is still under debate. An alternative classification could be conceived that assigns regimes according to the (non-observable) targets of the monetary authorities. There, both Canada and (particularly) Mexico would be deemed managed floats, as will be any country that keeps the exchange rate in check to limit inflationary pressures. However, the previous discussion highlights the non-trivial problems involved in defining classification variables that accurately capture the latent objective function of the central bank. An additional shortcoming relates to countries that peg to undisclosed baskets: Without a concrete knowledge of the “target” for monetary policy, it becomes difficult to assess whether such target is imposing a constraint on macro policy or not. Thus, whereas we identify these cases (based on a de jure criterion), we leave them unclassified. While for these cases the de jure information can still be used, our work does not improve upon the existing classification. The main contribution of the paper is to present an exchange rate regime classification which relies heavily on facts rather than on the legal characteristic of the regime. We believe it may become an important starting point for future empirical work in the area. Although some basic findings already emerged from the simple inspection of the new classification, only further empirical research will reveal its real usefulness. In fact, research on exchange rate regimes has so far revealed a relatively minor impact of the choice of regime on economic performance.51 We believe that many of these “irrelevance” results may change in light of the de facto classification reported here, as some preliminary work using this database already seems to suggest.52