International Monetary Fund. External Relations Dept.
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The rapid integration of international financial markets—under which the economic developments and policy decisions of one country may affect many other countries—underscores the importance of IMF surveillance to ensure that the international monetary system operates effectively and that each member observes the obligations set forth in the IMF’s Articles of Agreement. This report forms part of the IMF’s multilateral surveillance aimed at reviewing and analyzing progress in promoting a stable system of exchange rates and orderly exchange arrangements among its member countries.1
This chapter reviews country experiences in the use of different exchange rate regimes and their trends since 1990, and discusses some of the factors underlying these trends. It analyzes the evolution of exchange rate regimes based on de facto policies, which have formed the basis of the IMF’s official exchange rate regime classifications since January 1999. This system classifies exchange rate regimes based on the degree of commitment to a given exchange rate path and not necessarily on the degree of flexibility of the exchange rate. It also adds a new dimension by placing members’ exchange rate regimes in their overall monetary policy framework (see Box 2.1). The de facto classification has been backdated to 1990, while providing more details on some regime categories (Figure 2.1).1
Momentum toward currency convertibility has diminished since 1997, when a series of emerging market crises occurred.1 IMF members have continued eliminating—albeit at a slower pace—exchange restrictions on the making of payments and transfers for current international transactions subject to the IMF’s jurisdiction under Article VIII or maintained under the transitional arrangements of Article XIV (Box 3.1). Progress toward liberalization of the broader range of exchange controls on both current and capital account transactions, however, appears to have been limited. This assessment is based on the number of countries maintaining exchange restrictions and controls and does not necessarily reflect the degree of effectiveness of restrictions and controls, which depends critically on their design and on the degree of regulatory enforcement.2 Moreover, changes in the number of restrictions and controls need to be interpreted with caution in light of improved reporting by members and the greater coverage of foreign exchange and cross-border transactions in the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), a major source of information for this report.
There is a close relationship between the foreign exchange regime and the microstructure of the foreign exchange market. Foreign exchange market microstructure is an important consideration in the choice of an exchange rate regime, along with macroeconomic policy objectives.1 Conversely, the adoption of a particular exchange rate regime, and the related foreign exchange regulations, have a considerable influence on the development and structure of the foreign exchange market. These interactions need to be taken into account to ensure the smooth functioning of the overall exchange rate and monetary policy regime.
Drawing further on information in the Survey on Foreign Exchange Market Organization, this chapter examines factors affecting exchange rate volatility. In addition to indicators of macroeconomic performance and the choice of exchange rate regime, these include in particular various (micro) structural features of the foreign exchange market. The results presented in this chapter offer a number of new insights into the role that structural factors may play in the choice and implementation of exchange rate policy.1
This forthcoming title in the Departmental Paper Series describes the special challenges facing low-income countries as economic growth contracts by an estimated 1.1 percent globally. Coping with the Crisis: Challenges Facing Low-Income Countries provides an assessment of the implications of the financial crisis for low-income countries, evaluates the short-term macroeconomic outlook for these countries, and discusses the policy challenges they face. Chapters cover the outlook for global economic growth and commodity prices, an overview of how low-income countries have been affected, fiscal policy, monetary and exchange rate policy responses, potential external financing needs and how the international community, including the IMF, can help countries meet them. The challenges ahead for low-income countries are delineated, including debt vulnerabilities and the need for countries to develop well-regulated local capital markets and banking systems, as well as enhanced public sector efficiency.
This paper reviews developments and issues in the exchange arrangements and currency convertibility of IMF members. Against the backdrop of continuing financial globalization and a series of emerging market crises since 1997, there have been important changes in the evolution of exchange rate regimes and the pace of liberalization of current and capital transactions among IMF member countries. There has been a shift away from intermediate regimes according to the IMF's official exchange rate regime classification system based on de facto exchange rate policies. The de facto exchange rate classification system has helped to clarify the nature and role of members' exchange rate regimes. It has facilitated discussions with country authorities about the implementation of exchange rate regimes and hence has contributed to more effective surveillance of the international monetary system. The use of exchange controls appears to have been little influenced by the degree of flexibility of exchange rate regimes or the occurrences of currency crises.
Edited by Zubair Iqbal and Ravi Kanbur, this volume consists of papers presented at a joint IMF and World Bank conference on external financing for low-income countries. The primary focus was on the impact of external indebtedness on low-income countries, mainly in sub-Saharan Africa, the HIPC Debt initiative, the determinants and role of private capital flow, policies that could be implemented to catalyze private capital flows, and the appropriate role for official finance in the period ahead.
Selin Sayek, Laura Alfaro, Areendam Chanda, and Sebnem Kalemli-Ozcan
This paper examines the role financial markets play in the relationship between foreign direct investment (FDI) and economic development. We model an economy with a continuum of agents indexed by their level of ability. Agents can either work for the foreign company or undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents to take advantage of knowledge spillovers from FDI, magnifying the output effects of FDI. Empirically, we show that well-developed financial markets allow significant gains from FDI, while FDI alone plays an ambiguous role in contributing to development.