Title Page
OCCASIONAL PAPER 270
Exchange Rate Regimes and the Stability of the International Monetary System
Atish R. Ghosh, Jonathan D. Ostry and Charalambos Tsangarides
INTERNATIONAL MONETARY FUND
Copyright
© 2010 International Monetary Fund
Production: IMF Multimedia Services Division
Figures and Typesetting: Julio Prego
Cataloging-in-Publication Data
Ghosh, Atish R.
Exchange rate regimes and the stability of the international monetary system / Atish R. Ghosh, Jonathan D. Ostry, and Charalambos Tsangarides – Washington, D.C.: International Monetary Fund, 2010.
p. ; cm.—(Occasional paper (International Monetary Fund ; no. 270)
Includes bibliographical references.
ISBN: 9781589069312
1. Currency question. 2. Foreign exchange. I. Ostry, Jonathan D., 1962-II. Tsangarides, Charalambos G. III. International Monetary Fund. IV. Title. V. Series: Occasional paper (International Monetary Fund) ; no. 270.
HG256.G67 2010
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Contents
Preface
1 Overview
2 Introduction
3 Countries’ Choice of Exchange Rate Regime
Trends in Regimes
Macroeconomic Performance under Alternative Exchange Rate Regimes
Implications for the Choice of Regime
4 Sources of Systemic Stress
Reserves Accumulation
Global Imbalances
Reserve Currency Issues
5 Conclusions
Appendix Regime Classification
References
Boxes
3.1. Ten Years of the Euro: Achievements and Challenges
4.1. Dollar versus Sterling: The Interwar Antecedent of Switching Dominant Reserve Currencies
Figures
3.1. Frequency Distribution of Exchange Rate Regimes, 1980–2008
3.2. Emerging Market Countries: De Jure and De Facto Floats
3.3. Real Exchange Rate Volatility at Alternative Horizons
3.4. Inflation
4.1. Emerging Market Countries: Foreign Reserves
4.2. Emerging Market Counties: Reserves versus Projected U.S. Dollar Value of GDP Growth
4.3. IMF Quota and New Arrangements to Borrow Resources
4.4. Current Account Surpluses and Deficits in G-20 Countries
4.5. Currency Composition of Reserves
A1. Index of Similarity between Exchange Rate Regime Classifications
Tables
3.1. Distribution of Exchange Rate Regimes
3.2. Monetary Policy under Alternative Exchange Rate Regimes
3.3. Overall Government Balance, 1990–2007
3.4. Fiscal Policy under Alternative Exchange Rate Regimes
3.5. Inflation, 1980–2007
3.6. Inflation under Alternative Exchange Rate Regimes
3.7. Output Growth, 1980–2007
3.8. Channels of Indirect Association between Regime and Output Growth
3.9. Output Growth under Alternative Exchange Rate Regimes
3.10. Likelihood of Currency or Financial Crisis by Exchange Rate Regime
3.11. Current Account Balances
3.12. Current Account Reversals
3.13. Nonlinear Current Account Persistence Regression by Regime
3.14. Impact of Pegged Exchange Rates on Goods and Services Trade
3.15. Consumption-Smoothing Capital Flows under Alternative Exchange Rate Regimes
3.16. Structure of Net Capital Flows
A1. Classification of Exchange Rate Regimes
Preface
The member countries of the International Monetary Fund (IMF) undertake to collaborate with each other and the IMF to assure orderly exchange arrangements and promote a stable system of exchange rates, recognizing that the essential purpose of the international monetary system is to facilitate the exchange of goods, services, and capital among countries, and to sustain sound economic growth. This Occasional Paper, requested by Executive Directors during their discussion of the Independent Evaluation Office (IEO) report on IMF exchange rate policy advice (IEO, 2007), reviews the stability of the overall system of exchange rates by examining macroeconomic performance (inflation, growth, crises) under alternative exchange rate regimes; implications of exchange rate regime choice for interaction with the rest of the system (external adjustment, trade integration, capital flows); and potential sources of stress to the international monetary system.
The paper was prepared under the direction of Jonathan D. Ostry, Deputy Director, Research Department, by a staff team led by Atish R. Ghosh, Chief, Systemic Issues Division, and comprising Marcos Chamon, Chris Crowe, Julian di Giovanni, Jun Kim, Marco Terrones, and Charalambos Tsangarides. The authors are grateful to Mary Yang and Maria Victoria Fazio for research assistance, and to Sheila Tomilloso for administrative assistance. David Einhorn of the External Relations Department, and Mahvash S. Qureshi of the Research Department, coordinated the production and publication of the paper.
An earlier draft of the paper was presented to the IMF’s Executive Board at an informal seminar, and the current version has benefited from the comments made by Executive Directors on that occasion. The opinions expressed in the paper are those of the authors, however, and do not necessarily reflect the views of the national authorities, the International Monetary Fund, or IMF Executive Directors.