- Inci Ötker
- Published Date:
- April 2007
© 2007 International Monetary Fund
Production: IMF Multimedia Services Division
Typesetting: Alicia Etchebarne-Bourdin
Figures: Bob Lunsford
Moving to greater exchange rate flexibility: operational aspects based on lessons from detailed country experiences / Inci Ötker-Robe and David Vávra, and a team consisting of Luis Ahumada … [et al.].—Washington, DC: International Monetary Fund, 2007.
p. cm.—(Occasional paper; 256)
Includes bibliographical references.
1. Foreign exchange administration—Case studies. 2. Foreign exchange rates—Case studies. 3. Monetary policy—Case studies. I. Vávra, David, 1972 – II. International Monetary Fund. III. Occasional paper (International Monetary Fund); no. 256 HG3851 .O854 2007
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- Part 1. The Overall Framework and Synthesis of Country Experiences
- I. Overview
- II. Country Experiences with Transition to Greater Flexibility: Operational Aspects Underpinning Durable Exits
- Part 2. Detailed Country Experiences
- III. Orderly Transitions
- IV. Disorderly Transitions
- I. From Fixed to Float: Operational Ingredients of Durable Exits to Flexible Exchange Rates
- II. Experiences with Short-Lived Exits to Greater Flexibility
- III. Ukraine: An Example of Ongoing Cautious Steps toward Greater Exchange Rate Flexibility
- IV. Foreign Exchange Hedging, Complementary Markets, and the Role of the Central Bank
- 1. Country Experiences with Transition from Pegged to Flexible Regimes: Nature of the Exits
- 2. Country Experiences with Transition from Pegged to Flexible Regimes: Motivation and Triggers of Exit
- 3. Extent of Preparedness for Transitioning to Greater Flexibility: Before the Full Float
- 4. Country Experiences with Transition from Pegged to Flexible Regimes: Sequencing with Supporting Elements
- 5. Extent of Preparedness for Transitioning to Greater Flexibility: Before Moving to a More Flexible Peg
- 6. Evolution of Chile’s Exchange Rate Regime since 1984
- 7. Evolution of Israel’s Exchange Rate Regimes, 1985–2005
- 8. Evolution of Poland’s Exchange Rate Regime since 1990
- 9. Evolution of Uruguay’s Exchange Rate Regime, 1990–2005
- 1. Addressing the Fear of Floating
- 2a. Exchange Rate Regime Evolutions: Gradual Orderly Exits
- 2b. Exchange Rate Regime Evolutions: Fast Disorderly Exits
- 3. Sequencing of Transitions with Supporting Elements: Gradual Orderly Exits
- 4. Sequencing of Transitions with Supporting Elements: Fast Disorderly Exits
- Appendix BoxA1. The Bank of Israel’s Role in Developing Foreign Exchange and Complementary Markets
- Appendix FigureA1. Preparing for an Orderly Exit from a Peg
The following conventions are used in this publication:
- In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.
- An en dash (–) between years or months (for example, 2005–06 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).
- “Billion” means a thousand million. “trillion” means a thousand billion.
- “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Many countries moved toward more flexible exchange rate regimes over the past decade, which reflects in part the belief that more flexible exchange rates provide a greater degree of monetary policy autonomy and flexibility in responding to external shocks, including large and volatile capital flows. There has often been a reluctance to let go of pegged exchange rates despite the benefits of flexible rates. The extensive institutional and operational requirements needed to support a floating exchange rate as well as difficulties in assessing the right time and manner to exit tend to be additional factors in this reluctance. This paper presents the concrete steps taken by certain countries in transitioning to greater exchange rate flexibility, with a view to elaborating on the operational ingredients that proved helpful in promoting successful and durable transitions. It attempts to provide a better understanding of how these various operational ingredients were established and coordinated with the exits, how their implementation interacted with macro and other conditions, and how they contributed to the smoothness of the exits.
The material in this paper was originally prepared in connection with a workshop on moving to greater exchange rate flexibility conducted in Ukraine in April 2005. The detailed case studies prepared subsequently also aimed at providing a follow-up to a discussion by the International Monetary Fund’s (IMF) Executive Board in December 2004 on “From Fixed to Float: Operational Aspects of Moving Toward Exchange Rate Flexibility” (IMF, 2004b). In concluding the discussion, Directors asked for more guidance on the sequencing and order of importance of the operational elements, backed by analysis of more specific country experiences and cross-country studies.
The detailed country case studies and their syntheses were prepared by a team of experts under the guidance and direction of İnci Ötker-Robe, former Technical Assistance Wing, Europe, of the Monetary and Capital Markets Department (MCM). The experts, Luis Ahumada, Fernando Barrán, André Minella, Zbigniew Polański, Piotr Szpunar, Barry Topf, and David Vávra, are on the staff of the central banks of a number of countries that moved from various forms of pegged exchange rate regimes to floating exchange rates. The team collaborated closely with the former Exchange Regimes and Exchange Regime and Debt and Reserve Management Division (ER) of MCM, where the “Fixed to Float” paper (IMF, 2004a) had been prepared, in particular with Udaibir Das, Christian Mulder, and Eva Petrova. Neil Saker and Jahanara Zaman of ER contributed to two of the appendixes of this paper. Graham Colin-Jones provided editorial support and Maria Delia M. Araneta provided secretarial support. Sean Culhane of the External Relations Department edited the manuscript and coordinated the production of the publication.
The paper has benefited from comments of colleagues in MCM and in other departments of the IMF, and of Eduardo Loyo, Executive Director for Brazil. The views expressed in this paper are those of the IMF staff and do not necessarily reflect the views of national authorities or IMF Executive Directors.
Monetary and Capital Markets Department
Financial Markets Association
Central Bank of Uruguay
Bank of Israel
Central Bank of Brazil
Central Bank of Chile
certified financial analyst
Czech National Bank
Monetary Policy Committee (Brazil)
consumer price index
International Swap Dealers Association
Long-Term Capital Management
Monetary Policy Council (Poland)
National Bank of Poland
National Bank of Ukraine
New Israel sheqel
over the counter
purchasing power parity