Verifying Exchange Rate Regimes

Posted: 2 Apr 2002

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Eduardo Fajnzylber

Universidad Adolfo Ibañez

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Abstract

Credibility and transparency are at the core of the current debate on exchange rate regimes. Among the reasons why intermediate regimes have fallen out of favor, a possibly important one is that they are not transparent: it is difficult to verify them. This paper investigates how difficult it is for investors to verify from observable data if the authorities are in fact following the exchange rate regime that they claim to be following. Of the various intermediate regimes, we focus on the case of basket pegs with bands. Statistically, it can take a surprisingly long span of data for an econometrician or an investor to verify whether such a regime is actually in operation. We find that verification becomes more difficult as the regime's bands widen and/or more currencies enter in the basket peg. At the other extreme, we also analyze regimes announced as free-floating, and find that in some cases the observed exchange rate data are consistent with the announced regime.

Keywords: Verifiability, transparency, exchange rate regimes, basket peg, bands, target zone, floating

JEL Classification: F31, F32, F33, F36

Suggested Citation

Frankel, Jeffrey A. and Fajnzylber, Eduardo and Schmukler, Sergio, Verifying Exchange Rate Regimes. Journal of Development Economics, Vol. 66, No. 2, December 2001. Available at SSRN: https://ssrn.com/abstract=296961

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Mailbox 22
Cambridge, MA 02138
United States
617-496-3834 (Phone)
617-496-5747 (Fax)

HOME PAGE: http://www.ksg.harvard.edu/fs/jfrankel

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eduardo Fajnzylber

Universidad Adolfo Ibañez ( email )

Diagonal Las Torres 2640 Peñaleón
Presidente Errázuriz 3485 Las Condes
Santiago, 794-1169
Chile

Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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