TY - JOUR
AU - Goldstein,, Morris
AB - Max Corden has expanded substantially the Ohlin Memorial Lectures that he gave at the Stockholm School of Economics in September 2000. The result is a self‐contained, beautifully crafted analysis of the choice of exchange rate regimes for developing countries, particularly those where international capital mobility is significant. This is vintage Corden: lucid and concise presentation of the key theoretical building blocks, application of those building blocks to shed light on the major policy issues at hand, and review of the most relevant country case studies for policy lessons – all very readable and dispensed with uncommon judgement. After an introductory chapter that takes the reader on a brief tour of the evolution of exchange rate regimes (from the gold standard to managed floating), the author lays out three distinct approaches to exchange rate and monetary policy, namely, the nominal anchor approach, the real targets approach, and the exchange rate stability approach. The nominal anchor approach focuses on the mechanisms and institutions designed to deliver a low rate of inflation – be it fixing the exchange rate to an anchor currency, or adopting an inflation targeting framework for monetary policy under a floating exchange rate. Under the real targets approach, monetary and exchange rate policy are directed at a real target – namely real output or employment; the emphasis here is on how the currency regime influences the country's ‘competitiveness’ and its ability to achieve internal balance. Finally, the exchange rate stability approach compares regimes on short‐run volatility of exchange rates and related transaction costs. Corden argues persuasively that actual regime choice needs to take all three approaches into account. Using these three approaches as an organising device, Corden goes systematically over the choices for an exchange rate regime: dollarisation, currency unions, currency boards, fixed but adjustable pegs, crawling pegs, target zones, managed floating, and purely floating. Without pretending to capture the subtleties discussed, the following excerpts convey the flavour of the author's conclusions: (i) under conditions of high capital mobility, the fixed but adjustable regime (FBAR) is inferior to a pure‐floating regime (largely because the imperfect credibility of the FBAR, along with the high costs of defending it, make it too fragile); (ii) in contrast, under conditions of low capital mobility, the FBAR is superior to both the absolutely fixed regime and to the pure floating regime – provided that nominal wages are somewhat inflexible downwards, that devaluation can reduce the real wage, and that the enforcement and distortion costs of capital controls do not outweigh the benefits of the FBAR; (iii) while target zones get some points for exchange rate stability, this regime suffers from the same serious problems as the FBAR once the limits of the zone are reached; (iv) if an emerging economy can run budget surpluses in boom times and has no longer‐run debt problem, the case against fixed rates is weakened (since the contractionary effect of a negative shock can then be avoided by expansionary fiscal policy); (v) on the other hand, where fiscal policy itself is the problem and has to be largely taken as given, there is a strong argument for a flexible rate regime; (vi) while unhedged foreign‐currency borrowing can indeed produce contractionary devaluation, day‐to‐day movement of the exchange rate provides an important incentive for borrowers to hedge against currency risk; (vii) the exchange rate regime matters very much when there is a negative shock but much less during a boom; and (viii) when all is said and done, those developing countries that operate in a high capital mobility environment should follow a regime of managed floating, supplemented with an appropriate nominal anchor for monetary policy. There is much too to be gained from the country case studies that comprise four chapters. These cover the experiences of three Latin American countries (Chile, Brazil, and Mexico), Argentina's currency board experiment, the Asian currency crisis of 1997–8, and European Monetary Union. An appetizer: in Indonesia and Malaysia, and perhaps also in Korea, the explicit or implicit FBAR regime was not a significant cause of the crisis – but the initial FBAR in Thailand and Indonesia contributed to their currency mismatch problems and hence, increased the cost when the crises came. If I have a quibble or two, it is that the book is relatively light on recent empirical studies of the impact of alternative currency regimes, and that the author might have gone farther in distinguishing between what is necessary and what is sufficient to control the unhedged foreign‐currency borrowing problem. To sum up, this is a superb book that provides policymakers from developing countries with what they have long wanted, namely, an authoritative yet eminently practical guide on how to choose the type of exchange rate regime would best suit their needs. © Royal Economic Society 2003
TI - Too Sensational: On the Choice of Exchange Rate Regimes.
JF - The Economic Journal
DO - 10.1046/j.0013-0133.2003.172_6.x
DA - 2003-11-01
UR - https://www.deepdyve.com/lp/oxford-university-press/too-sensational-on-the-choice-of-exchange-rate-regimes-VV5nZ0b93q
SP - F663
VL - 113
IS - 491
DP - DeepDyve
ER -