Appendix: Regime Classifications
Any empirical study of exchange rate regimes must contend with issues of regime classification. Early work used a de jure classification—the regime declared by national authorities in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).1 Thereafter, de facto classifications that seek to categorize the regime according to the behavior of the exchange rate or the behavior of the central bank were developed in the literature.2
The distinction between de facto and de jure classifications is sometimes characterized as “deeds versus words”—with the implication that de facto classifications are better, because deeds presumably count for more than words. What this overlooks, however, is that the de jure classification captures the central bank’s commitment (for example, to a peg). As the policy credibility literature stresses, such commitments can affect expectations and hence economic outcomes (just as adoption of an inflation-targeting framework should affect inflationary expectations). De jure and de facto classifications thus capture different aspects of the exchange rate regime—and both are informative.
To date, however, empirical analysis has been hampered by two problems. First, the source and methodology underlying de jure and de facto classifications are usually quite different, making it difficult to judge whether different findings reflect substantive differences between the two classifications or simply the variety of samples and methodologies employed in different studies. Second, relatedly, there is little agreement between de facto classifications, with correlations between them ranging from 0.13 to 0.4, making it hard to know whether results are driven by genuine differences in performance across regimes or simply idiosyncrasies of the classification.
To address these problems, this paper uses both the IMF’s de jure and de facto classifications, to capture both the stated and implemented policies of the central bank.3 The de jure classification is based on self-assessment of member countries and official statements of policy published by the monetary authorities or recorded in the literature. The defacto classification is based on a variety of primary and secondary sources. The primary source is the information obtained through bilateral IMF surveillance, country teams’ regular communication with the authorities, and provision of technical assistance to member countries. Supplementary information includes press reports and articles, as well as other relevant papers (such as case studies from other multinational organizations and documents from economic research firms and investment banks), supported by an analysis of observed exchange rate and reserves behavior and relevant indicators. Sources are weighed to determine what best explains the behavior of the indicators. Under the assumption that exchange rate variability and flexibility are not the same, the present system makes no a priori assumptions about the behavior of currencies under different regimes or at different stages of market or economic development.4
Using the IMF’s de jure and de facto classifications has two advantages. First, the empirical results under the de jure and de facto classifications are more comparable, because they are based on a common source. Second, the IMF’s de facto classification is less idiosyncratic than others—in the sense that, observation by observation, a higher proportion of the other classifications agree with the IMF’s classification than with any other classification—giving confidence that the empirical results are likely to be robust and not driven by idiosyncrasies of the classification. Figure A1 compares the IMF’s de facto and de jure classifications with other classification methods. The IMF’s classifications receive a higher consensus score, suggesting that the IMF’s classifications are more similar to the comparator classifications.5
Index of Similarity between Exchange Rate Regime Classifications
Sources: R&R=Reinhart and Rogoff (2004); LYS = Levi-Yeyati and Sturzenegger (2003, 2005); and IMF staff estimates.Index of Similarity between Exchange Rate Regime Classifications
Sources: R&R=Reinhart and Rogoff (2004); LYS = Levi-Yeyati and Sturzenegger (2003, 2005); and IMF staff estimates.Index of Similarity between Exchange Rate Regime Classifications
Sources: R&R=Reinhart and Rogoff (2004); LYS = Levi-Yeyati and Sturzenegger (2003, 2005); and IMF staff estimates.The IMF’s de jure and de facto classifications group exchange rate regimes into eight categories: exchange arrangement with no separate legal tender, currency board arrangement, conventional pegged arrangement, pegged exchange rates within horizontal bands, crawling peg, crawling band, managed float with no predetermined path for the exchange rate, and independently floating arrangement. For the empirical work, regimes are classified into three categories—pegged, intermediate, and floating (Table A1).
Classification of Exchange Rate Regimes
(In percent of observations)
Classification of Exchange Rate Regimes
(In percent of observations)
| Full Sample 1980–2007 |
Subsamples | Full Sample 1980–2007 |
Subsamples | |||||
|---|---|---|---|---|---|---|---|---|
| 1980–89 | 1990–99 | 2000–07 | 1980–89 | 1990–99 | 2000–07 | |||
| De jure classification | De facto classification | |||||||
| Pegged regimes | 35.5 | 39.2 | 30.8 | 37.1 | 42.7 | 46.1 | 37.1 | 46.2 |
| (1) Hard pegs | 19.9 | 15.6 | 18.6 | 25.7 | 19.2 | 14.8 | 17.9 | 25.3 |
| (2) Conventional pegs | 15.6 | 23.6 | 12.2 | 11.4 | 23.5 | 31.2 | 19.2 | 20.9 |
| Intermediate regimes | 45.2 | 52.1 | 46.0 | 37.1 | 45.8 | 50.1 | 49.7 | 36.6 |
| (3) Basket pegs | 11.8 | 19.3 | 11.4 | 4.7 | 10.5 | 16.9 | 10.3 | 4.2 |
| (4) Pegged within bands | 10.8 | 15.1 | 10.1 | 7.3 | 6.2 | 8.1 | 7.5 | 2.7 |
| (5) Floats with rule-based intervention | 2.6 | 3.2 | 3.0 | 1.4 | 11.8 | 17.6 | 12.6 | 4.8 |
| (6) Floats with discretionary intervention | 20.0 | 14.5 | 21.5 | 23.7 | 17.3 | 7.5 | 19.3 | 24.8 |
| Floating regimes | 19.4 | 8.7 | 23.3 | 25.8 | 11.5 | 3.9 | 13.2 | 17.2 |
| (7) Independent floats | 19.4 | 8.7 | 23.3 | 25.8 | 11.5 | 3.9 | 13.2 | 17.2 |
Classification of Exchange Rate Regimes
(In percent of observations)
| Full Sample 1980–2007 |
Subsamples | Full Sample 1980–2007 |
Subsamples | |||||
|---|---|---|---|---|---|---|---|---|
| 1980–89 | 1990–99 | 2000–07 | 1980–89 | 1990–99 | 2000–07 | |||
| De jure classification | De facto classification | |||||||
| Pegged regimes | 35.5 | 39.2 | 30.8 | 37.1 | 42.7 | 46.1 | 37.1 | 46.2 |
| (1) Hard pegs | 19.9 | 15.6 | 18.6 | 25.7 | 19.2 | 14.8 | 17.9 | 25.3 |
| (2) Conventional pegs | 15.6 | 23.6 | 12.2 | 11.4 | 23.5 | 31.2 | 19.2 | 20.9 |
| Intermediate regimes | 45.2 | 52.1 | 46.0 | 37.1 | 45.8 | 50.1 | 49.7 | 36.6 |
| (3) Basket pegs | 11.8 | 19.3 | 11.4 | 4.7 | 10.5 | 16.9 | 10.3 | 4.2 |
| (4) Pegged within bands | 10.8 | 15.1 | 10.1 | 7.3 | 6.2 | 8.1 | 7.5 | 2.7 |
| (5) Floats with rule-based intervention | 2.6 | 3.2 | 3.0 | 1.4 | 11.8 | 17.6 | 12.6 | 4.8 |
| (6) Floats with discretionary intervention | 20.0 | 14.5 | 21.5 | 23.7 | 17.3 | 7.5 | 19.3 | 24.8 |
| Floating regimes | 19.4 | 8.7 | 23.3 | 25.8 | 11.5 | 3.9 | 13.2 | 17.2 |
| (7) Independent floats | 19.4 | 8.7 | 23.3 | 25.8 | 11.5 | 3.9 | 13.2 | 17.2 |
Table A1 shows the distribution of observations across the three aggregate groups for both de jure and de facto classifications. The share of intermediate regimes is the highest and that of floating the lowest across both classifications. Similarly, the share of intermediate regimes decreased, that of floating regimes increased, and that of pegged regimes remained broadly constant from 1980–89 to 2000–07 (while falling in 1990–99) in both classifications. Pegged regimes increased mainly in advanced economies (as a result of the formation of the European Monetary Union, while the share of floating regimes increased in both advanced and emerging economies. However, a noticeable difference between the two classifications is the proportion of pegged and floating regimes: the former is persistently lower and the latter persistently higher in the de jure vis-à-vis de facto classification. The overall degree of correlation between the two classifications is 0.76.
Ghosh and others (1997a) use a de jure classification but separately categorize pegs with frequent parity adjustments.
There are four main de facto classifications based on measurable outcomes of the exchange rate behavior and one based on assessing the central bank behavior. The first four types come from Ghosh, Gulde, and Wolf (2003), who base their de facto classification on the behavior of the exchange rate; Levy-Yeyati and Sturzenegger (2005), who use data on the exchange rate, reserves, and interest rates to characterize intervention policy; Reinhart and Rogoff (2004), who use data on the exchange rate supplemented by information on parallel market rates; and a two-way classification by Shambaugh (2004), who bases it on the behavior of the exchange rate against an identified reference currency. The IMF’s de facto classification based on the 1997 IMF system is the only classification assessing central bank behavior.
Until 1999, the IMF used a de jure classification. Starting in 2000, the AREAER discontinued the de jure classification and adopted a de facto classification; it now publishes both. Bubula and ötker-Robe (2003) expanded the de facto classification for the period 1990–2000. More recently, the de jure and de facto classifications have been extended further back to cover the period 1945–89 (and brought up to date) by Anderson (2009), who generously agreed to share his data.
The main drawbacks of the de facto classification system are the reliance on primary sources; reliance on due diligence, which makes current (nonhistorical) assessments very difficult (because, in practice, most de facto reclassifications are made with a lag); and the quality and availability of primary and secondary sources (particularly for earlier periods), which makes weighing different sources more difficult.
The consensus score is calculated for the IMF’s de jure and de facto classifications, the Reinhart-Rogoff (2004) classification, and the Levy-Yeyati (2003, 2005) classification. For each observation (country-year), the classification receives a score of 0.25 for each of the other classifications that agrees with it, using a three-way categorization (pegged, intermediate, float). The IMF’s de facto classification receives a score of 74 percent (70 percent if the de jure classification is dropped from the “other” classifications)—compared to around 62 percent for the Reinhart-Rogoff and Levy-Yeyati-Sturzenegger classifications. A low score means that most other classification methods would classify that observation differently. Although that does not necessarily imply that the classification is “wrong,” a low average score suggests that any empirical results obtained using such a classification are unlikely to be robust.
References
Aghion, Philippe, Philippe Bacchetta, and Abhijit Banerjee, 2000, “A Simple Model of Monetary Policy and Currency Crises,” European Economic Review, Vol. 44 (May), pp. 728–38.
Alesina, Alberto, Silvia Ardagna, and Vincenzo Galasso, 2008, “The Euro and Structural Reforms,” NBER Working Paper No. 14479 (Cambridge, Massachusetts: National Bureau of Economic Research).
Anderson, Harald, 2009, “Exchange Policies Before Widespread Floating (1945-1989)” (unpublished).
Baldwin, Richard E., 2006, In or Out: Does It Matter? An Evidence-Based Analysis of the Euro’s Trade Effects (London: Centre for Economic Policy Research).
Barro, Robert, and David Gordon, 1983, “Rules, Discretion, and Reputation in a Model of Monetary Policy,” Journal of Monetary Economics, Vol. 12, No. 1, pp. 101–21.
Bayoumi, Tamim, and F. Vitek, 2009, “The Future of the Dollar as an International Currency” (unpublished; Washington: International Monetary Fund).
Becker, Törbjörn I., Olivier Jeanne, Paolo Mauro, Jonathan D. Ostry, and Romain Rancière, 2007, Country Insurance: The Role of Domestic Policies, IMF Occasional Paper No. 254 (Washington: International Monetary Fund).
Berg, Andrew, Jonathan D. Ostry, and Jeromin Zettelmeyer, 2008, “What Makes Growth Sustained?” IMF Working Paper 08/59 (Washington: International Monetary Fund).
Borensztein, Eduardo, Jeromin Zettelmeyer, and Thomas Philippon, 2001, “Monetary Independence in Emerging Markets: Does the Exchange Rate Regime Make a Difference?” IMF Working Paper 01/01 (Washington: International Monetary Fund).
Boughton, James, 2001, Silent Revolution: The International Monetary Fund, 1979–89 (Washington: International Monetary Fund).
Bubula, Andrea, and Inci Ötker-Robe, 2003, “Are Pegged and Intermediate Regimes More Crisis Prone?” IMF Working Paper 03/223 (Washington: International Monetary Fund).
Canzoneri, Matthew, Robert E. Cumby, and Behzad Diba, 1998, “Fiscal Discipline and Exchange Rate Regimes,” CEPR Discussion Paper No. 1899 (London: Centre for Economic Policy Research).
Chinn, Menzie, and Jeffrey Frankel, 2008, “Why the Euro Will Rival the Dollar,” International Finance, Vol. 11, No. 5, pp. 49–73.
Chinn, Menzie, and Hiro Ito, 2006, “Financial Openness Measure.” Available via the Internet: www.ssc.wisc.edu/~mchinn/research.html.
Chinn, Menzie, and Shang-Jin Wei, 2008, “A Faithbased Initiative: Do We Really Know that a Flexible Exchange Rate Regime Facilitates Current Account Adjustment?” LaFollette School Working Paper No. 2008-008 (Madison, Wisconsin: University of Wisconsin-Madison).
Council of the European Communities, 1970, “Report to the Council and the Commission on the Realization by Stages of Economic and Monetary Union in the Community,” European Communities Bulletin No. 11–1970 (Luxembourg).
Cukierman, Alex, 1992, Central Bank Strategy, Credibility, and Independence (Cambridge, Massachusetts: MIT Press).
Dell’Ariccia, Giovanni, Julian di Giovanni, André Faria, M. Ayhan Kose, Paolo Mauro, Jonathan D. Ostry, Martin Schindler, and Marco Terrones, 2008, Reaping the Benefits of Financial Globalization, IMF Occasional Paper No. 264 (Washington: International Monetary Fund).
di Giovanni, Julian, and Jay C. Shambaugh, 2008, “The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime,” Journal of International Economics, Vol. 74 (March), pp. 341–61.
Eichengreen, Barry, and Marc Flandreau, 2008, “The Rise and Fall of the Dollar, or When Did the Dollar Replace Sterling as the Leading International Currency?” NBER Working Paper No. 14154 (Cambridge, Massachusetts: National Bureau of Economic Research).
Frankel, Jeffrey, 2003, “A Proposed Monetary Regime for Small Commodity Exporters: Peg the Export Price (‘PEP’),” International Finance, Vol. 6 (Spring), pp. 61–88.
Frankel, Jeffrey, 2008, “The Estimated Effects of the Euro on Trade: Why Are They Below Historical Effects of Monetary Unions Among Smaller Countries?” NBER Working Paper No. 14542 (Cambridge, Massachusetts: National Bureau of Economic Research).
Frankel, Jeffrey, and Andrew Rose, 1996, “Currency Crashes in Emerging Markets: An Empirical Treatment,” Journal of International Economics, Vol. 41 (November), pp. 351–66.
Freund, Caroline, 2005, “Current Account Adjustment in Industrial Countries,” Journal of International Money and Finance, Vol. 24 (December), pp. 1278–98.
Friedman, Milton, 1953, “The Case for Flexible Exchange Rates,” in Milton Friedman Essays in Positive Economics (Chicago: University of Chicago Press), pp. 157–203.
Ghosh, Atish, Anne-Marie Gulde, Jonathan D. Ostry, and Holger Wolf, 1997a, “Does the Nominal Exchange Rate Regime Matter?” NBER Working Paper No. 5874 (Cambridge Massachusetts: National Bureau of Economic Research).
Ghosh, Atish, Anne-Marie Gulde, Jonathan D. Ostry, and Holger Wolf, 1997b, “Does the Exchange Rate Regime Matter for Inflation and Growth?” IMF Economic Issues No. 2 (Washington: International Monetary Fund).
Ghosh, Atish, Anne-Marie Gulde, and Holger Wolf, 2003, Exchange Rate Regimes: Choices and Consequences (Cambridge, Massachusetts: MIT Press).
Ghosh, Atish, and Jun Il Kim, 2007, “Adjustment of an Oil Exporter to a Nominal Exchange Rate Change” (unpublished; Washington: International Monetary Fund).
Ghosh, Atish, and Jonathan D. Ostry, 1997, “Macroeconomic Uncertainty, Precautionary Saving, and the Current Account,” Journal of Monetary Economics, Vol. 40 (September), pp. 121–39.
Ghosh, Atish, Marco Terrones, and Jeromin Zettelmeyer, 2008, “Exchange Rate Regimes and External Adjustment: New Answers to an Old Debate,” paper presented at the New International Monetary System Conference in honor of Alexander Swoboda, Geneva, May 30.
Habib, Maurizio, and Jan Stráský, 2008, “Oil Exporters: In Search of an External Anchor,” ECB Working Paper No. 958 (Frankfurt: European Central Bank).
Independent Evaluation Office (IEO), 2007, “An IEO Evaluation of IMF Exchange Rate Policy Advice, 1999–2005,” IMF Staff Report SM/07/132 (Washington: International Monetary Fund).
International Monetary Fund (IMF), 2006, “Article IV of the Fund’s Articles of Agreement—An Overview of the Legal Framework” (Washington: International Monetary Fund). Available via the Internet: www.imf.org/external/np/pp/eng/2006/062806.pdf.
International Monetary Fund (IMF), “Staff Report on the Multilateral Consultation on Global Imbalances with China, the Euro Area, Japan, Saudi Arabia, and the United States,” IMF Staff Report SM/07/232 (Washington: International Monetary Fund).
International Monetary Fund (IMF), 2008, “The GCC Monetary Union: Choice of Exchange Rate Regime,” EBM/08/92-1 (Washington: International Monetary Fund). Available via the Internet: www.imf.org/external/np/pp/eng/2008/082808a.pdf.
International Monetary Fund (IMF), 2009, “Review of Fund Facilities—Analytical Basis for Fund Lending and Reform Options” (Washington: International Monetary Fund). Available via the Internet: www.imf.org/external/np/pp/eng/2009/020609a.pdf.
Jeanne, Olivier, and Romain Rancière, 2009, “The Optimal Level of International Reserves for Emerging Market Countries: A New Formula and Some Applications” (unpublished; Washington: International Monetary Fund). Available via the Internet: www.econ.jhu.edu/People/Jeanne/JeanneRanciere_Feb09.pdf.
Johnson, Simon, Jonathan D. Ostry, and Arvind Subramanian, 2007, “The Prospects for Sustained Growth in Africa: Benchmarking the Constraints,” NBER Working Paper No. 13120 (Cambridge Massachusetts: National Bureau of Economic Research).
Kim, Jun Il, 2009, “Optimal Reserves for Self-Insurance Against Sudden Stops” (unpublished; Washington: International Monetary Fund).
Krugman, Paul, 1979, “A Model of Balance-of-Payment Crises,” Journal of Money, Credit and Banking, Vol. 11 (August), pp. 311–25.
Lee, Jaewoo, Gian Maria Milesi-Ferretti, Jonathan D. Ostry, Alessandro Prati, and Luca Antonio Ricci, 2008, Exchange Rate Assessments: CGER Methodologies IMF Occasional Paper No. 261 (Washington: International Monetary Fund).
Levy-Yeyati, Eduardo, and Federico Sturzenegger, 2003, “To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth,” American Economic Review, Vol. 93 (November), pp. 1173–93.
Levy-Yeyati, Eduardo, and Federico Sturzenegger, 2005, “Classifying Exchange Rate Regimes: Deeds vs. Words,” European Economic Review, Vol. 49 (August), pp. 1603–35.
Mussa, Michael, 1986, “Nominal Exchange Rate Regimes and the Behavior of Real Exchange Rates: Evidence and Implications,” Carnegie-Rochester Conference Series on Public Policy, Vol. 25 (Autumn), pp. 117–214.
Mussa, Michael, Paul Masson, Alexander Swoboda, Esteban Jadresic, Paolo Mauro, and Andrew Berg, 2000, Exchange Rate Regimes in an Increasingly Integrated World Economy, IMF Occasional Paper 193 (Washington: International Monetary Fund).
Postelnyak, Anna, 2008, “Offsetting Crisis Risks under Less Flexible Exchange Rate Regimes” (unpublished).
Qureshi, Mahvash S., and Charalambos Tsangarides, 2010, “The Empirics of Exchange Rate Regimes and Trade: Words vs. Deeds,” IMF Working Paper No. 10/48 (Washington: International Monetary Fund).
Rancière, Romain, 2009, “Implied Exchange Rate Uncertainty and International Trade” (unpublished).
Reinhart, Carmen, and Kenneth Rogoff, 2004, “The Modern History of Exchange Rate Arrangements: A Reinterpretation,” Quarterly Journal of Economics, Vol. 119 (February), pp. 1–48.
Rogoff, Kenneth, Aasim Husain, Ashoka Mody, Robin Brooks, and Nienke Oomes, 2004, Evolution and Performance of Exchange Rate Regimes, IMF Occasional Paper No. 229 (Washington: International Monetary Fund).
Schenk, Catherine, 2009a, “The Retirement of Sterling as a Reserve Currency after 1945: Lessons for the US Dollar?” Available via the Internet: www.e.utokyo.ac.jp/cirje/research/workshops/history/history_paper2009/history1109.pdf.
Schenk, Catherine, 2009b, “Proposals to Replace Reserve Currencies During the Bretton Woods Era” (unpublished).
Schenk, Catherine, 2010, The Decline of Sterling: Managing the Retreat of an International Currency, 1945–1992 (Cambridge, United Kingdom: Cambridge University Press).
Setser, Brad, 2007, “The Case for Exchange Rate Flexibility in Oil-Exporting Economies,” Policy Brief No. PB07-8 (Washington: Peterson Institute for International Economics).
Shambaugh, Jay C., 2004, “The Effect of Fixed Exchange Rates on Monetary Policy,” Quarterly Journal of Economics, Vol. 119 (February), pp. 301–52.
Wolf, Holger, Atish Ghosh, Helge Berger, and Anne-Marie Gulde, 2008, Currency Boards in Retrospect and Prospect (Cambridge, Massachusetts: MIT Press).
