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Exchange Rate Management and Crisis Susceptibility: A Reassessment
Author:
Mr. Atish R. Ghosh
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,
Mr. Jonathan David Ostry
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, and
Miss Mahvash S Qureshi
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Series:
IMF Working Papers
Volume/Issue:
Volume 2014: Issue 011
Language:
English
Publication Date:
24 Jan 2014
DOI:
https://doi.org/10.5089/9781484383971.001
ISBN:
9781484383971
ISSN:
1018-5941
Pages:
46
Keywords:
WP; solid windowtext 1pt; intermediate exchange rate regime; currency crisis; banking crisis; regime classification; exchange rate regimes; crisis; vulnerabilities; emerging markets; regime choice; crisis propensity; current account; EME crisis; growth crisis; exchange rate overvaluation; banking crisis propensity; Conventional peg; Exchange rate arrangements; Exchange rate flexibility; Currencies; Currency crises; Europe; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper revisits the bipolar prescription for exchange rate regime choice and asks two questions: are the poles of hard pegs and pure floats still safer than the middle? And where to draw the line between safe floats and risky intermediate regimes? Our findings, based on a sample of 50 EMEs over 1980-2011, show that macroeconomic and financial vulnerabilities are significantly greater under less flexible intermediate regimes—including hard pegs—as compared to floats. While not especially susceptible to banking or currency crises, hard pegs are significantly more prone to growth collapses, suggesting that the security of the hard end of the prescription is largely illusory. Intermediate regimes as a class are the most susceptible to crises, but “managed floats”—a subclass within such regimes—behave much more like pure floats, with significantly lower risks and fewer crises. “Managed floating,” however, is a nebulous concept; a characterization of more crisis prone regimes suggests no simple dividing line between safe floats and risky intermediate regimes.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund