Verifying Exchange Rate Regimes

72 Pages Posted: 20 Apr 2016 Last revised: 28 Sep 2017

See all articles by Martin Ravallion

Martin Ravallion

Georgetown University

Emanuela Galasso

World Bank - Development Research Group (DECRG)

Teodoro Lazo

Republic of Argentina - Trabajar Project Office

Ernesto Philipp

Republic of Argentina - Trabajar Project Office

Date Written: July 31, 2000

Abstract

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.

Keywords: Environmental Economics & Policies, Macroeconomic Management, Economic Stabilization, Economic Theory & Research, Fiscal & Monetary Policy, ICT Policy and Strategies, Payment Systems & Infrastructure

Suggested Citation

Ravallion, Martin and Galasso, Emanuela and Lazo, Teodoro and Philipp, Ernesto, Verifying Exchange Rate Regimes (July 31, 2000). World Bank Policy Research Working Paper No. 2397, Available at SSRN: https://ssrn.com/abstract=632740

Martin Ravallion (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States

Emanuela Galasso

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

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-3902 (Phone)
202-522-1153 (Fax)

Teodoro Lazo

Republic of Argentina - Trabajar Project Office

Buenos Aires
Argentina

Ernesto Philipp

Republic of Argentina - Trabajar Project Office

Buenos Aires
Argentina

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