Appendix I. Country Coverage and Document Selection
1. This paper focuses on the largest countries in each of three categories: advanced, emerging, and other countries. The countries included in the study were selected with a view to represent a significant share of the global economy as well as a balanced representation from three types of countries or economic areas: advanced, emerging market, and other economies (including mostly developing countries and large oil exporters). It was decided to measure a country’s importance in terms of its share in global U.S. dollar GDP in 2005 and to ensure a balanced representation of the three groups by varying the income threshold cut-off ratios:
Advanced countries (WEO definition, except for the case of Korea, which was considered as an emerging market country). All countries with a share in global dollar GDP in excess of 1 percent were included. For the purpose of this exercise, it was decided to enter the Euro Area as one “country,” reflecting the importance of the euro as a global currency. This selection criterion yielded five countries plus the Euro Area: the United States, the Euro Area, Japan, the United Kingdom, Canada, and Australia.
Emerging market countries (countries considered to rely significantly on external market financing24). All countries with a share in global dollar GDP in excess of 0.25 percent were included. This selection criterion yielded 19 countries and economic areas: China, Korea, Brazil, Russia, Mexico, India, Turkey, Poland, Indonesia, South Africa, Argentina, Thailand, Malaysia, Venezuela, Israel, Czech Republic, Pakistan, Colombia, and Hungary.
Other countries. In this case the cut off level was lowered to a share of 0.1 percent of global dollar GDP. In order to reduce the dominance of oil-exporting countries, only the largest country in the Gulf Cooperation Council was included (Saudi Arabia). The resulting list includes five countries: Saudi Arabia, the Islamic Republic of Iran, Nigeria, Bangladesh, and Vietnam.
2. The country selection reflected different needs. First, a need to keep the sample relatively small, so as to allow a more in-depth treatment of issues. Second, as this paper was stimulated by the claim that possible shortcomings in the Fund’s assessment of exchange rate issues may impair its surveillance of regional or global issues, 25 it was decided to focus on large countries. As a result, the total sample covers over 90 percent of global GDP. The cost of focusing on larger countries, however, is that the sample is not representative of the whole membership. In particular, the review does not cover many issues that could be relevant for small/low income countries.
3. This review, while focused on Article IV reports, considered a larger set of documents, such as other relevant internal or published documents. While Article IV reports remain the central staff input into the surveillance process, other documents are also important as far as they inform the Board, communicate staff’s view to the authorities through less sensitive channels (mission meetings, other oral communications, or letters), provides information about staffs decision on how to deal with key exchange rate issues (e.g., internal notes and memos, pre-brief meetings).26 This approach also allows an assessment of how concerns for confidentiality or political sensitivity affected the analysis and dissemination of information.
Only staff reports issued between January 1, 2001 and May 31, 2006 were considered.
Appendix II. Questionnaire on the Treatment of Exchange Rate Issues
Description of the de facto exchange rate regime:
Is there a clear description of the exchange rate regime? If not, is the exchange rate regime self-evident?
Does this description correspond to the IMF de facto classification?
Does it correspond to the description given by other analysts (e.g., financial institutions, academics)?
If relevant, does the report adequately discuss intervention policies? Other comments
Assessment of the exchange rate regime and policy consistency:
Is the suitability of the exchange regime explicitly assessed?
If yes, do the staff reports weigh the different pros and cons of the regime? Do they draw convincing conclusions from this analysis? How do these conclusions compare with those of other analysts, if any (e.g., financial institutions, academics) and the academic literature on exchange rate regimes?
If not, how important is a discussion of the exchange rate regime for macroeconomic stability?
Does the staff report adequately discuss the implications of economic policies for the exchange rate/regime and/or for the balance of payments?
Does the assessment correspond to the description given by other analysts (e.g., financial institutions, academics)? If not, is the view taken by staff adequately substantiated?
Assessment of the level of the exchange rate and policies affecting the exchange rate:
Does the staff report provide an assessment of the level of the real exchange rate’s consistency with its fundamental determinants?
How was the assessment made? Did staff use econometric techniques, different indicators of competitiveness (relative price comparisons, or market shares, assessments of the sustainability of the current account positions)?
Has staff adequately taken into account all important factors and is the discussion internally consistent?
How do the conclusions/analysis compare to those of other analysts, if any (e.g., financial institutions, academics)? Are staffs conclusions adequately substantiated?
Does staff discuss whether economic policies have an impact on the sustainability of the external position and exchange rate?
The main author of this paper is Ketil Hviding, with input from Katerina Alexandraki, Eva Gutierrez, and Mercedes Vera Martin, under the guidance of Carlo Cottarelli. The task force set up for the assessment (see paragraphs 13-15 below) included Brian Aitken, Martin Cerisola, Natan Epstein, Domenico G. Fanizza, Eva Gutierrez, Thomas Harjes, Matthew Jones, Xiangming Li, Donal McGettigan, Mwanza Nkusu, Luca Antonio Ricci, Marianne Schulze-Ghattas, and Mercedes Vera Martin. The task force benefited from discussions with staff of the Monetary and Capital Markets Department and from its forthcoming Review of Exchange Arrangements, Restrictions and Markets (REARM).
See The Managing Director’s Report on Implementing the Fund’s Medium-Term Strategy, April 5, 2006 (www.imf.org/external/np/pp/eng/2006/040506.pdf)
See “IMF Executive Board Reviews the Fund’s Surveillance,” Public Information Notice No. 04/95, August 24, 2004. (www.imf.org/external/np/sec/pn/2004/pn0495.htm)
See Appendix I for further details. This review was based on staff reports as they were presented to the Executive Board. For the papers reviewed, there were deletions in four documents referring to staff’s exchange rate assessment, in accordance with the Fund’s deletion policy. In addition, 25 percent of staff reports reviewed were not published.
Goldstein, M. and M. Mussa, 2005, “The Fund Appears to Be Sleeping at the Wheel,” Op-ed in the Financial Times, October 3, 2005.
Bergsten, F.C. and J. Williamson (eds.), 2004, “Dollar Adjustment: How Far? Against What?” Institute for International Economics, Special Report 17.
For an overview of different views see a collection of papers presented at a conference on IMF Reform, Washington D.C. September 2005: Truman, E, M. (ed.), Reforming the IMF for the 21st Century, Special Report no. 19, Institute for International Economics, April 2006.
The exact cut-off date was May 31, 2006, with respect to the issuance of the report.
“Major remarks” refer to clear shortcomings relative to the agreed standard. “Minor remarks” refer to areas where the treatment could have been improved relative to best practice.
In Argentina’s 2005 staff report, staff claimed that the exchange rate regime could be classified as a peg. In 2004, the Fund staff’s de facto exchange rate classification described Argentina’s exchange rate regime as a managed float with no predetermined path for the exchange rate. The 2005 staff report on Pakistan analyzed the exchange rate regime using the Reinhart-Rogoff methodology to conclude that the regime could be more adequately described as a peg since mid-2003. See Argentina, Country Report No. 05/236, and Pakistan, Country Report No.05/409 (http://www.imf.org/external/pubs/cat/shortres.cfm)
Most, but not all, the staff reports included a bilateral exchange rate chart against the potential anchor currency. While not a requirement, this is a useful tool to determine the de facto exchange rate regime.
The update refers to end-2003. Since then some of the currencies have shown increased flexibility.
There were two borderline cases in which it was decided that this issue did not give rise to “remarks.” Including these two cases would not, however, significantly change the picture summarized in Table 1.
As an example of a particularly proactive stance on exchange rate regime issues, concluding statements of the 2005 staff visit to Hungary and the 2006 Article IV advocated abandoning the exchange rate band. Both statements were published.
For a description of the view that exchange rate regime is secondary to the quality of other economic policies, see Calvo, G. and Mishkin, F. “ The Mirage of Exchange Rate Regimes for Emerging Markets” The Journal of Economic Perspectives, Volume 17, Number 4, November 2003, pp. 99-118(20).
For a reference to a competitive (and managed/pegged) exchange rate as being one of the 10 headings of the Washington Consensus, see: Williamson, J (1993). “Democracy and the Washington Consensus,” World Development, 21 (8), pp 1329-1336.
See Stanley Fischer, 2000, Presentation to the International Financial Institutions Advisory Board on www.imf.org.
Note also that, in at least some cases, the call for increased flexibility may in fact reflect a call for an appreciation in the presence of a strong current account position and capital inflows.
In about two-thirds of these cases, the assessments were reported in the staff appraisal section of the reports.
In the sample, if anything, there was a slight bias toward undervaluation.
For example, of the countries judged to have undervalued exchange rates, four out of seven were in Asia, while the other two were oil exporters.
The list of countries is the universe of staff’s vulnerability assessment. Inclusion criteria include access to international capital markets as indicated by a country’s inclusion in an emerging market bond or equity index or recent international bond issues. Exclusion criteria include classification as an industrial country in the IMF’s International Financial Statistics, GDP of less than SDR 5 billion in 2004, and significant net foreign asset position.
See, for example, Goldstein and Mussa (2005) referred to above.
Technical assistance documents were, however, not reviewed.