The Nexus Between the Fear of Floating and Expenditure-Switching External Adjustment Mechanism: Emerging European and Latin American Floaters

• Autorzy: Emilija Beker Pucar
• Języki publikacji: EN

Abstrakty

EN

The focus of this research is the identification of the fear of floating (FOF) problem as a vulnerable ground for employing the exchange rate (ER) as a shock absorber with consequent limitations for expenditure-switching external adjustment mechanism. This research aims to fill the literature gap stressing the connection between FOF and the functioning of expenditure-switching external adjustment mechanism, highlighting the nexus from the viewpoint of emerging European vs. Latin American floaters, as well as from individual emerging European floaters (the Czech Republic, Hungary, Poland, Romania) in the period 2000Q1-2017Q2 with standard and panel VAR analysis. FOF is identified as a stronger reaction of foreign exchange reserves and interest rate to nominal ER shocks, as well as higher variations of real ER explained with price shocks compared to nominal ER shocks. As a confirmation, in countries with expressed FOF current account shock is more transmitted to economic activities (expenditure-reducing external adjustment) rather than nominal ER changes (expenditure-switching mechanism). The results confirm the vulnerable position of European emerging floaters compared to Latin American floaters, bearing in mind the stronger FOF coinciding with the higher currency mismatch. Within the sample of European emerging floaters the most vulnerable position concerning the nexus was detected for Romania, while the most favorable position was found in the case of Poland.(original abstract)

Słowa kluczowe

EN

Emerging markets; Foreign Exchange (FX)

PL

Rynki wschodzące; Rynek walutowy

• Czasopismo: Argumenta Oeconomica
• Rocznik: 2020
• Numer: nr 1 (44)
• Strony: 47--76

Twórcy

autor

Emilija Beker Pucar

• University of Novi Sad, Serbia

Bibliografia

• Allegret, J.-P., Sallenave, A., Capital flow bonanzas and monetary policy in emerging Europe: responses to the global financial crisis, "Post-Communist Economies", 27, pp. 429-447, 2015.
• Andrews, D. W. K., Lu, B., Consistent model and moment selection procedures for GMM estimation with application to dynamic panel data models, "Journal of Econometrics", 101, pp. 123-164, 2001.
• Arellano, M., Bover, O., Another look at the instrumental variable estimation of error components model, "Journal of Econometrics", 68, pp. 29-51, 1995.
• Ball, C. P., Reyes, H., Inflation targeting or fear of floating in disguise? A broader perspective, "Journal of Macroeconomics", 30 (1), pp. 308-326, 2008.
• Baqueiro, A., Díaz de León, A., Torres, A., Fear of floating or fear of inflation? The role of the exchange rate pass through, [In:] Monetary policy of a changing environment, vol. 19, Bank for International Settlements, pp. 338-354, 2003.
• Belhocine, N., et al., Taking Stock of Monetary and Exchange Rate Regimes in Emerging Europe, IMF Departmental Paper Series, 2016.
• Bollano, J., Ibrahimaj, D., Current account determinants in Central Eastern European countries, Graduate Institute Geneva Working Paper, no. HEIDWP0022-2015, Geneva 2015.
• Bofinger, T., Monetary Policy under De Facto Dollarization: The Cases of Peru and Croatia, https://www.wiwi.uni-wuerzburg.de/fileadmin/12010100/Diplomarbeiten/Schaub-Diplomarbeit.pdf, 2009.
• Bussiere, M., Karadimitropoulou, A., León-Ledesma, M. A., Current account and the real exchange rate: Disentangling the evidence, Bank of Greece Eurosystem Working Paper, no. 239, 2017.
• Calvo, G. A., Reinhart, C. M., Fear of floating, "The Quarterly Journal of Economics", CXVII (2), pp. 379-408, 2002.
• Canova, F., Ciccarelli, M., Panel vector autoregressive models - a survey, ECB Working Paper, no. 1507, 2013.
• Carrière-Swallow, Y., Magud, N. E., Yépez, J. F., No Pain, All Gain? Exchange Rate Flexibility and the Expenditure-Switching Effect, IMF Working Paper, no. 18/213, 2018.
• Chitu, L., Was Unofficial Dollarization/Euroisation an Amplifier of the 'Great Recession' of 2007-09 in Emerging Economies? ECB Working Paper, no. 473, 2012.
• Corsetti, G., Kuester, K., Müller, G. J., Fixed on flexible rethink exchange rate regimes after the Great Recession, CFM discussion paper series, no. 2017-21, 2017.
• De Hoyos, R., Sarafidis, V., Testing for cross-sectional dependence in panel-data models, "Stata Journal", 6, pp. 482-496, 2006.
• Devereux, M. B., Yu, C., ER adjustment in financial crisis, https://www.imf.org/external/ np/seminars/eng/2016/ExchangeRates/pdf/Devereux.pdf, 2016.
• Eberhardt, M., Nonstationary panel econometrics and common factor models: An introductory reader, Unpublished mimeo, 2009.
• Edwards, S., Savastano, M. A., Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know? http://citeseerx.ist.psu.edu/viewdoc/download? doi=10.1.1.196.4254&rep=rep1&type=pdf, 1999.
• Edwards, S., Levy Yeyati, E., Flexible Exchange Rates as Shock Absorbers, NBER Working Paper, no. 9867, 2003.
• Edwards, S., The relationship between exchange rates and inflation targeting revisited, [in:] Mishkin, F., Schmidt-Hebbel, K. (eds.), Monetary Policy under Inflation Targeting, pp. 373-413. Central Bank of Chile, Santiago 2007.
• Eichengreen, B., Hausmann, R., Panizza, U., Currency mismatches, debt intolerance, and original sin: Why they are not the same and why it matters, [in:] Edwards, S. (ed.), Capital controls and capital flows in emerging economies: policies, practices and consequences, pp. 121-169. Chicago, University of Chicago Press, 2007.
• European Central Bank, ECB Monthly Bulletin, Economic and Monetary Developments, External Environment in the Euro Area, https://www.ecb.europa.eu/ppdf/mobu/ mb201401en.pdf, 2014.
• Friedman, M., The case for flexible exchange rates, [in:] Essays in positive economics, pp. 157-203. University of Chicago Press, 1953.
• Ilzetzki, E., Reinhart, C. M., Rogoff, K. S., Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold? NBER Working Paper, no. 23134, 2017.
• International Monetary Fund, Annual Report 2017: How to Jump-Start Growth, http://www.imorg/external/pubs/ft/ar/2017/eng/assets/ar17-appII.pdf, 2017.
• Ibarra, A. C., Is Latin America Overcoming its Fear of Floating? "Cuadernos de Economía", 44, pp. 183-209, 2017.
• Ganapolsky, E. J. J., Optimal Fear of Floating: The Role of Currency Mismatches and Fiscal Constraint, Federal Reserve Bank of Atlanta Working Paper, no. 2003-31, 2003.
• García-Solanes, J., Rodríguez López, J., Torres, J. L., Demand Shocks and Trade Balance Dynamics, Universidad Pablo de Olavide, Department of Economics Working Paper, no. 07.10, 2007.
• Ghosh, A., Ostry, J., Qureshi, M., ER Management and Crisis Susceptibility: A Reassessment, "IMF Economic Review", 63 (1), pp. 238-276, 2015.
• Ghosh, A. R., Terrones, M., Zettelmeyer, J., Exchange Rate Regimes and External Adjustment: New Answers to an Old Debate, [in:] Wyplosz, C. (ed.), The New International Monetary System: Essays in Honor of Alexander Swoboda. Routledge, 2008.
• Ghosh, A. R., Qureshi, M. S., Tsangarides, C. G., Friedman Redux: External Adjustment and Exchange Rate Flexibility, IMF Working Paper, no. 14/146, 2014.
• Gregorio, D. J., Resilience in Latin America: Lessons from Macroeconomic Management and Financial Policies, IMF Working Paper, no. 13/259, 2013.
• Habermeier, K., Kokenyne, A., Veyrune, R., Anderson, H., Revised System for the Classification of Exchange Rate Arrangements, IMF Working Paper, no. 09/2011, 2009.
• Hausmann, R., Panizza, U., Stein, E., Why Do Countries Float the Way They Float? Research Department, Inter-American Development Bank, 1999.
• Herrmann, S., Jochem, A., Current account adjustment in EU countries: Does euro-area membership make a difference? Deutsche Bundesbank discussion paper, no. 49, 2013.
• Hoffmann, M., Fixed versus flexible exchange rates: A panel VAR analysis, Retrieved from https://web.warwick.ac.uk/res2003/papers/Hoffmann.pdf, 2003.
• Hufner, F., Foreign Exchange Intervention as a Monetary Policy Instrument - Evidence for Inflation Targeting Countries. Physica-Verlag Heidelberg, New York 2004.
• Janković, M., Impact of financial structure on economic growth: Example of Serbia, Croatia and Slovenia, "Anali Ekonomskog Fakulteta u Subotici", 55 (42), pp. 147-162, 2020.
• Josifidis, K., Allegret, J-P., Gimet, C., Beker Pucar, E., Macroeconomic policy responses to financial crisis in emerging European economies, "Economic Modelling", 36, pp. 577- 591, 2014.
• Kaminsky, G. L., Reinhart, C. M., The twin crises: the causes of banking and balance-ofpayments problems, "The American Economic Review", 89, pp. 473-500, 1999.
• Kang, J. S., Shambaugh, J. C., Progress towards external adjustment in the euro area periphery and the Baltics, IMF Working Paper, no. 131, Washington, 2014.
• Lane, P. R., Milesi-Ferreti, G. M., Global Imbalances and External Adjustment after the Crisis, IMF Working Paper, no. 14/151, 2014.
• Lahiri, A., Vegh, C. A., Living with the Fear of Floating: An Optimal Policy Perspective, [in:] Edwards, E., Frankel, J. (eds.), Preventing Currency Crisis in Emerging Markets. University of Chicago Press, Chicago 2001.
• Love, I., Abrigo, M. R. M., Estimation of panel vector autoregression in Stata: A package of programs, http://paneldataconference2015.ceu.hu/Program/Michael-Abrigo.pdf, 2015.
• Love, I., Zicchino, L., Financial development and dynamic investment behavior: Evidence from panel VAR, "Quarterly Review of Economics and Finance", 46, pp. 190-210, 2006.
• Mishkin, F. S., Can Inflation Targeting Work in Emerging Market Countries, NBER Working Paper, no. 10646, 2004.
• Mishkin, F. S., Schmidt-Hebbel, K., Does Inflation targeting make a difference? NBER Working Paper, no. 12876, 2007.
• Obstfeld, M., Ostry, J. D., Qureshi, M. S., A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies, IMF Working Paper, no. 17/130, 2017.
• Pesaran, H., A simple panel unit root test in the presence of cross section dependence, Cambridge Working Papers in Economics, no. 0346, Cambridge 2003.
• Pietrucha, J., Exchange rate regime and external adjustment in CEE countries, "Journal of Economics and Management", 20(2), pp. 38-52, 2015.
• Rahman, J., Current account developments in new member states of the European Union, IMF Working Paper, no. 92, Washington 2008.
• Ranciere, R., Tornell, A., Vamvakidis, A., Currency Mismatch and Systemic Risk in Emerging Europe, G-Mond Working Paper, no. 4, 2010.
• Reinhart, C., Goodbye inflation targeting, Hello fear of floating? Latin America after the global financial crisis, MPRA Working Paper, no. 51282, 2013.
• Roodman, D., How to do xtabond2: An introduction to difference and system GMM in Stata, "The Stata Journal", 9, pp. 86-139, 2009.
• Shelburne, R. C., Current account deficits in European emerging markets, UNECE discussion paper, no. 2008.2, Geneva 2008.
• Uzun, A., Financial dollarization, monetary policy stance and institutional structure: the experience of Latin America and Turkey, PhD Thesis, https://etd.lib.metu.edu.tr/upload/ 12606739/index.pdf.
• Vamvakidis, A., Convergence in emerging Europe: Sustainability and vulnerabilities, IMF Working Paper, no. 181, Washington 2008.

Identyfikatory

DOI

10.15611/aoe.2020.1.03