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Verifying exchange rate regimes, Volume 1
Author:Serven, Luis; Frankel, Jeffrey; Fajnzylber, Eduardo; Schmukler, Sergio; Country:Iceland; Chile;
Date Stored:2000/08/19Document Date:2000/07/31
Document Type:Policy Research Working PaperSubTopics:Economic Theory & Research; ICT Policy and Strategies; Fiscal & Monetary Policy; Environmental Economics & Policies; Macroeconomic Management; Economic Stabilization; Payment Systems & Infrastructure
Language:EnglishMajor Sector:(Historic)Multisector
Region:Latin America & Caribbean; Europe and Central AsiaReport Number:WPS2397
Sub Sectors:Non-Sector SpecificCollection Title:Policy, Research working paper ; no. WPS 2397
Volume No:1  

Summary: Credibility and transparency are at the core of the current debate about exchange rate regimes. The steady growth in the magnitude and variability of international capital flows has complicated the question of whether to use floating, fixed, or intermediate exchange rate regimes. Emerging market economies are abandoning basket pegs, crawling pegs, bands, adjustable pegs, and various combinations of these. One of several reasons intermediate regimes have fallen out of favor is that they are not transparent; it is very difficult to verify them. Verifiability is a concrete example of the principle of "transparency" so often invoked in discussions of the new international financial architecture but so seldom made precise. A simple peg or a simple float may be easier for market participants to verify than a more complicated intermediate regime. The authors investigate how difficult it is for investors to verify from observable data whether the authorities are in fact following the exchange rate regime they claim to be following. Of the various intermediate regimes, they focus on basket pegs with bands. Statistically, it can take a surprisingly long span of data for an econometrician or investor to verify whether such a regime is actually in operation. The authors find that verification becomes more difficult as the regime's bands widen or more currencies enter the basket peg. At the other extreme, they also analyze regimes described as the regime's bands widen or more currencies enter the basket peg. At the other extreme, they also analyze regimes described as free floating and find that in some cases the observed exchange rate data do validate the announced regime.

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