Reinhart Rogoff Classification ER Use For Codes

The Modern History of Exchange Rate Arrangements: A Reinterpretation Author(s): Carmen M. Reinhart and Kenneth S.
Rogoff Source: The Quarterly Journal of Economics, Vol. 119, No. 1 (Feb., 2004), pp. 1-48 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/25098676 . Accessed: 17/07/2011 11:49
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THE
QUARTERLY JOURNAL OF ECONOMICS

Vol. CXIX February 2004 Issue 1
THE MODERN HISTORY OF EXCHANGE RATE ARRANGEMENTS: A REINTERPRETATION*

Carmen
We
M. Reinhart
and Kenneth
S. Rogoff
rate
One
a novel of reclassifying historical system exchange develop our study difference between and previous classifications rates data on market-determined parallel exchange employ monthly Our approach differs from the IMF official 1946 for 153 countries. key
regimes. is that we to
going back classification
than random); it also differs (which we show to be only a little better radically at historical reclassification. Our classification from all previous points attempts rate regimes. under to a rethinking of economic alternative exchange performance on exchange rate regimes Woods had less impact of Bretton the breakup Indeed, believed. than is popularly
I.
Introduction
II ex of post-World War the history new monthly based on an extensive for 1946-2001. Our ap 153 countries not from classifi countries' declared differs only officially proach we a to be better than it cations show little (which random); only of previous also differs radically from the small number attempts at historical reclassification.1 rewrites paper rate arrangements, change across data set spanning This
*
to thank Alberto Arminio authors wish Lahiri, Alesina, Fraga, Amartya at Harvard Uni Andrew Rose, Miguel Reinhart, Savastano, participants Canada-US Economic and Monetary Interna Conference, Integration versity's Fund-World Bank Joint of Economic tional Monetary Bureau National Seminar, York University, New Princeton and Research Summer Institute, University, comments referees for useful and suggestions, and Kenichiro three anonymous as for excellent and Ioannis research Daouda Tokatlidis Kashiwase, Sembene, are at sistance. Data and material to this available paper background http: I /www.puaf. umd.edu.facultylpaperslreinhartlreinhart.htm. on is given in the IMF's Annual 1. The official classification Exchange Report Rate Arrangements until and Exchange asked mem Restrictions, which, recently, as one to self-declare to ber states their arrangement of four categories. belonging The Vincent ? 2004 by the President and Fellows Technology. The Quarterly Journal of Economics, of Harvard February College 2004 and the Massachusetts Institute of
2 As a first
we and data on parallel innovation, incorporate dual exchange rate markets, which have been enormously impor tant not only in developing countries but in virtually all the countries until the late well up 1950s, and sometimes European We that to classification that fails argue any beyond. algorithm one ex rate between unified official (with systems distinguish "black" or parallel market) and all change rate and no significant in the vast majority is fundamentally flawed. of Indeed, or or rate dual the dual systems, multiple exchange floating rate is not only a far better barometer of monetary parallel policy than is the official exchange rate, it is often the most economically half the time for rate.2 Very meaningful frequently?roughly rates have been used as a find that dual/parallel official pegs?we form of "back door" floating, albeit one usually by accompanied in our approach The second is that we controls. novelty exchange ar of the history of exchange extensive develop chronologies and related such as exchange controls and factors, rangements a battery with of descriptive reforms. Together statis currency what distinction between tics, this allows us to draw a nuanced countries declare as their official de jure regime, and their actual others de facto rate practices. To capture the wide range of exchange our for of allows fourteen arrangements, categories approach or no rate from tender separate legal exchange regimes, ranging a strict peg to a dysfunctional "freely falling" or "hyperfloat." rate from our reclassification of exchange Some highlights
arrangements are as follows.
or multiple have and parallel markets rates, dual, more In than far is frequently commonly acknowledged. prevailed in our sample had dual or of the countries 1950, 45 percent rates; many more had thriving parallel markets. Among multiple rates were the dual or multiple the industrialized economies, First,
into a the four-way either extended official classification Previous studies have or relied on statis more et al. [1997]), informative (see Ghosh taxonomy largely to regroup and Sturzenegger tical methods (see Levy-Yeyati country practices and of its former the limitations revised [2002]). The Fund, strategy, recognizing rate arrangements in toward the official upgraded classifying exchange approach rate to exchange in 1999. Notably, all these 1997 and again prior approaches or not they accept the country's whether declared classification, regime, regime on official rates. have been based solely exchange we are we rates in to this refer 2. When context, focusing exchange multiple one or more on the cases where is very is market-determined. This of the rates rates are all fixed and simply official from the cases where the multiple different are typically act as a differential tax on a variety of transactions. Dual markets or may not be legal. markets may legal, whereas parallel
EXCHANGE RATE ARRANGEMENTS 3 norm in the 1940s and the 1950s, and in some cases, these lasted to the view lend strong until much later. Our data support two Bordo that Bretton Woods stressed [1993] encompassed by in the pre rate arrangements of exchange kinds very different and that the period of meaningful and postconvertibility periods rate stability was quite short-lived. In the developing exchange such practices the 1980s remained world, through commonplace and 1990s and into the present. are We show that market-determined markets dual/parallel barometers of underlying important monetary policy. This may in cases such as modern-day be obvious the where Myanmar at the beginning of 2003 exceeded 700 premium parallel market the phenomenon is much more percent. As we show, however, as a with the market often parallel premium general, serving to the direction of rate reliable future official guide exchange over Whereas markets have been dual/parallel changes. marginal some episodes, in others, they have been economically important a and there are many instances where few transactions take only assess at official rate. the To the of place importance secondary we collected data that allow us (legal or illegal) parallel markets, cases going to estimate in many export misinvoicing practices, back to 1948. These estimates from the official show that leakages in many of the episodes when market were significant there were dual or parallel markets. one uses market-determined rates in place of Second, when official rates, the history of exchange rate policy begins to look For example, it becomes obvious that de facto very different. floating was common during the early years of the Bretton Woods era of "pegged" exchange rates. Conversely, "floats" of the many turn to out be (de facto) pegs, crawling post-1980s pegs, or very narrow bands. Of countries listed in the official IMF classification as managed 53 percent turned out to have de facto pegs, floating,
crawls, or narrow bands to some anchor currency.
to pegs for 33 percent of the (which account Third, our new observations 1970-2001 to "Natural" during (according the most popular rate regime over mod classification), exchange ern history has been the crawling which accounted for over peg, 26 percent of the observations. was 1990 to 2001 this the During most common type of arrangement in emerging Asia and Western Canada and the United Hemisphere (excluding States), making of the observations, up for about 36 and 42 percent respectively. our taxonomy a new category: introduces Fourth, freely fall
next
the twelve-month inflation rate is equal to It turns out to be a crowded per annum.3 about 12 Vz percent of the observations in a in the freely falling As category. result, as "freely float is about three times as common "freely falling" accounts for only 4 V2 percent of the total observa ing," which tions. accounts the official for (In classification, freely floating over 30 percent over the past decade.) of observations Our new classification makes of the up 22 and 37 percent freely falling in Africa and Western observations, respectively, Hemisphere Canada and the United 1970-2001. In States) (excluding during the 1990s freely falling accounted for 41 percent of the observa tions for the transition economies. Given the distortions associ ated with very high inflation, any fixed versus flexible exchange rate regime that do not break out the freely falling comparisons are meaningless, as we shall confirm. episodes reasons to seek a better approach There are many important one is the recog to classifying rate regimes. Certainly, exchange on the costs and benefits nition that contemporary of thinking rate arrangements has been profoundly in alternative exchange on the empirical fluenced of studies differ by the large number ences in growth, business trade, inflation, cycles, and commodity price behavior. Most have been based on the official classifications rates. In light of the new evidence we and all on official exchange we in Baxter results and that the influential collect, conjecture in differences there are no significant Stockman [1989]?that across to be due business arrangements?may cycles exchange rate of exchange the fact that the official historical groupings are misleading. arrangements as follows. In the next section we present The paper proceeds of dual or to establish and importance the incidence evidence we our III rate In Section sketch practices. exchange multiple rate arrangements. Sec for reclassifying exchange methodology some of the possible to our approach, tion IV addresses critiques our results with and provides the "official history," compares on the evidence of how our reclassification may reshape examples rate arrangements facets of links between and various exchange some of the main The final section reiterates economic activity.
the first six months in the freely falling 3. We also include category following cases an exchange but only for those rate crisis for details), (see the Appendix or a or a a to transition from the crisis where marked peg quasi-peg managed float. independent
ing, or the cases where or exceeds 40 percent indeed, with category our sample occurring
EXCHANGE RATE ARRANGEMENTS findings, detailed while country to this paper provides material background our analysis. that underpin chronologies of Dual Importance Rate Arrangements and Multiple
5 the
II. The
and Incidence Exchange
In this section we document the incidence of dual or parallel or markets and rate practices otherwise) (legal multiple exchange War II. We then that the evidence during post-World present a rate market-determined better is indicator of the exchange than official rate. the Fi monetary underlying policy exchange a sense eco to of the for nally, provide quantitative importance we present nomic activity of the dual or parallel esti market, mates we of "leakages" from the official market. Specifically, measures of provide quantitative export misinvoicing practices. use monthly We primarily data on official and market-deter mined rates for the period 1946-2001. In some in exchange the data for the market-determined rate is only available stances, for a shorter period and the background material the provides on a country-by-country basis. The pre-1999 market particulars determined rate data come from various issues of Pick's exchange Pick's Black Market and World Yearbook, Currency Yearbooks, and the official rate comes from the same Currency Reports, sources as the IMF. The quotes are end-of-month and as well are rates and not subject to revisions. For the recent exchange the monthly ex data on market-determined (1999-2001) period come rates sources from the the change (i.e., original country central banks), for those countries where there are active parallel markets for which data are available.4 Since our coverage spans more than 50 years, numerous it encompasses cases of monetary reforms in the units so the data of account, involving changes were spliced accordingly to ensure continuity. U.A. On the Popularity Practices of Dual and Multiple Exchange Rate
I illustrates de facto and de jure nonunified Figure exchange The figure shows the incidence of exchange rate regimes. over 1950-2001, with and without out arrangements stripping rate
4. These countries include Afghanistan, Angola, Bolivia, Burundi, (DCR), Dominican Congo Republic, Macedonia, Mauritania, Myanmar, Pakistan, Nigeria, menistan, Ukraine, Uzbekistan, Yemen, Yugoslavia, Belarus, Belize, Argentina, Ghana, Egypt, Iran, Libya, Turk Rwanda, Tajikistan, and Zimbabwe.
1950
1970-1973 Figure I Rate
1974-1990
1991-2001
The
Incidence
of Dual
or Multiple
Exchange
Arrangements,
1950-2001:
Simplified IMF Classification

on Exchange Sources: International Fund, Annual Monetary Arrange Report ments Restrictions and Exchange and International Financial Pick and Statistics; World vari S?dillot Yearbook, [1971]; International Analysis, Currency Currency ous issues. rate arrangements Exchange of limited managed flexibility, classified floating, as "Other" include the IMF's and independently floating. categories
or multiple rates. The IMF clas of dual markets exchange into what it was back in the days of sification has been simplified of Bretton Woods?namely, Pegs and Other.5 The dark portions cases with and the the bars represent unified rates, exchange out the dual, multi of each bar separates lightly shaded portion cases. In 1950 more than half (53 percent) of all ple, or parallel or more two rates. the involved Indeed, arrangements exchange cases rate practices and active parallel of multiple exchange heyday was before restoration of convertibility markets the 1946-1958, to IMF classifi in Europe. Note the official that also, according in for the supreme cation, pegs reigned early 1970s, accounting over 90 percent In fact, over rate arrangements. of all exchange that, as we shall half of these "pegs" masked parallel markets show, often exhibited quite different behavior.
5. For working
paper
a history of the evolution of this paper, version
of the IMF's classification strategy, Reinhart and Rogoff [2002].
see
the
EXCHANGE RATE ARRANGEMENTS II.B. The Market-Determined Monetary Policy Exchange Rate as an Indicator of
rates is of data on market-determined While the quality and time, we nevertheless believe likely to vary across countries of the underlying far better barometers these data to be generally rates. For instance, if monetary policy than are official exchange a with maintaining the laxity in monetary policy is not consistent that the market fixed official exchange rate, one would expect of rate starts ahead the de inevitable determined depreciating oc the official realignment of the official rate. When valuation of what had previously is simply a validation curs?it transpired in the free market. shown in the three Indeed, this is the pattern cases II for the of and Iran? of Bolivia, Indonesia, Figure panels are accom more cases in the that such many displayed figures This also emerges pany the 153 country pattern chronologies.6 and Japan in the economies often in the developed European II. years following World War ex more that the market-based To illustrate rigorously rate is a better indicator of the monetary policy stance change two exercises for each coun than the official rate, we performed ex examined whether the market-determined try. First, we in the official rate systematically realignments change predicts a currency in Figure II. To do so, we regressed rate, as suggested on the parallel market crash dummy premium lagged one to six our in If the the countries for each of months, developing sample.7 rate market of the devaluations exchange consistently anticipates official its coefficient should be and rate, positive statistically rate does not validate If, in turn, the official exchange significant. on the lagged market ex the market rate, then the coefficient or rate will be not I Table negative change simply significant. results of the country-by-country time series cases In the number of (97 probit regressions. overwhelming on the coefficient the rate market-determined percent), exchange is positive. In about 81 percent of the cases, the sign on the was positive coefficient and statistically for Indeed, significant.
6. See "Part I. The Country and Chartbook, Mate Chronologies Background to A Modern of Exchange Rate Arrangements: A Reinterpretation" at History htm. http: I /www.puaf. umd.edu/facultylpapers/reinhart/reinhart. are used. A severe 7. Two of currency crashes definitions crash currency or higher monthly to a 25 percent refers which is at least 10 percent depreciation a than the previous The "milder" version month's higher depreciation. represents 12.5 percent which is at least 10 percent above the preced monthly depreciation see in the Appendix. details ing month's depreciation; rial
summarizes
the

Official Bolivia: Log of Official Market-Determined Exchange Rates
and Market-Determined 1972
January 1946-December
&
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
Indonesia: Log of Official
and Market-Determined 1972
Exchange
Rates
January 1946-December 8 6
3 4
I 2 o 1 s?
I-2
d 2 -6 -8 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972
Iran: Log of Official
and Market-Determined
January 1946-December
Exchange 1998
Rates
1946
1950
1954
1958
1962
1966
1970
1974 II
1978
1981
1986
1990
1994
1998
Figure Official rency Sources: Rates Exchange Typically Pick and S?dillot [1971]; issues. various Yearbook, Validate
the Changes Currency
in the Market Analysis,
Rates Cur
International
World
EXCHANGE RATE ARRANGEMENTS TABLE I

Is the Parallel Market of a + the Rate a Good Exchange Summary Regression, Percent D0t = Probit + Predictor Rate? Estimation of Crashes in the Official
Country-by-Country ut "Mild"
? APt_?
crash
of countries
for which:
?
? > 0 and 0 and
>
significant3
0
81.4
97.1 2.9
?<
? < significant3
0
1.4
Sources: Pick's Currency Yearbook, World Currency Report, Pick's Black Market Yearbook, and the authors' calculations. Dot is a dummy variable that takes on the value of 1when there is a realignment in the official exchange rate along the lines described below and 0 otherwise, a and ? are the intercept and slope coefficients, respectively (our null hypothesis is ? > 0), AP?_? is the twelve-month change in the parallel exchange rate, lagged one to sixmonths (the lagswere allowed to vary country by country, as there was no prior reason to restrict dynamics to be the same for all countries) and ut is a random disturbance. Two definitions of currency crashes are used in the spirit of Frankel and Rose [1996].A "severe" currency crash refers to a 25 percent or higher monthly depreciation, which version represents a 12.5 percent is at least 10 percent higher than the previous month's depreciation. The "mild" monthly depreciation, which is at least 10 percent above the preceding month's depreciation. Since both defini tions of crash yield similar results, we report here only those for the more inclusive definition. The regression sample varies by country and is determined by data availability. a. At the 10 percent confidence level or higher.
Western
on the parallel as a region, the coefficient Hemisphere our sample. was in for all countries the premium significant are in with of These line those Bahmani-Oskooee, findings and Nasir data for 1973 [2002], who use panel annual Miteza, 1990 for 49 countries and employ a completely different approach. tests indicate that the official rate will Their panel cointegration rate in the long run. adjust to the market systematically correlations between inflation Second, we calculated pairwise as the twelve-month in the consumer (measured price change in the official and index) and the twelve-month percent change If the market rate is market earlier. rates, six months exchange a better pulse it should be (a priori) more of monetary policy, in Table with correlated inflation. As shown II, we find closely that for the majority of cases (about three-quarters of the coun in market-determined rates have exchange changes in with inflation than do changes correlations the official higher to this pattern of higher correla rate.8 An interesting exception tries) the
we use official prices 8. Note than black rather that, due to data limitations, or "street" prices to measure market inflation here. Otherwise, of the dominance even more rates in this exercise the market-determined would be presumably pronounced.
10
QUARTERLY JOURNAL OF ECONOMICS TABLE II

Inflation, Official and Market-Determined PaIRWISE the Exchange CORRELATIONS of: than than the the Rates: COUNTRY-BY-COUNTRY Percent of countries exchange rate official exchange rate official for which rate and rate and and inflation and inflation
correlations
The market-determined correlations correlations of the of the The market-determined
inflation 73.7 inflation 26.3
are higher are lower
Sources: International Monetary Fund, International Financial Statistics, Pick's Currency Yearbook, World Currency Report, Pick's Black Market Yearbook, and the authors' calculations. The correlations reported are those of the twelve-month percent change in the consumer price index with the twelve-month percent change in the relevant bilateral exchange rate lagged six months.
rate changes and the market-determined tions between exchange in the "Convertible Bret countries inflation is for the industrial an issue that merits further ton Woods" (1959-1973), period study. U.C. How Important Are Parallel Markets?
the parallel There are cases where (or secondary) exchange a An example is the to transactions. rate applies few limited only 1950 in the United "switch pound" during September Kingdom or not it is for dual unusual 1967.9 However, through April or to account for the lion's markets otherwise) (legal parallel than with the official rate being little more share of transactions the and O'Connell As Kiguel, [1997] note, Lizondo, symbolic. in importance when the gap rate typically diminishes official rate widens. between the official and market-determined a sense relevance of the dual or of the To provide comparative we proceed dimen two complementary along in the include a qualitative country description transac of what material) (see background specific chronologies versus the in market the official tions take place secondary mar measure a we of the potential ket. Second, quantitative develop into dual or parallel markets.10 size of the leakages exchange market, parallel sions. First, we
had dual rates through while the United 9. For example, officially Kingdom so trivial of the premium and rate was (both in terms 1967, the secondary April as a peg in our it is classified it applied of transactions the volume to) that In the next section we describe scheme classification material). (see background cases. deals with these how our classification algorithm hit a to Claessens 10. For instance, [1997], export underinvoicing according was the dual market crisis year in which 1982?the in Mexico historic during high
EXCHANGE RATE ARRANGEMENTS
11
and O'Connell [1997], we classify Ghei, Kiguel, epi Following markets into three tiers ac there are dual/parallel sodes where of the parallel market premium: cording to the level (in percent) or above but below low (below 10 percent), moderate (10 percent of dual/ and above). For the episodes (50 percent 50), and high we provide about which information category parallel markets, for the the average falls in (by calculating each episode premium to the information In addition of the episode). contained duration an extensive on export we constructed database in the premium, a or between what the difference country reports as misinvoicing, as its exports and what other countries report imports from that costs. for there are tight country, adjusted Historically, shipping links between and the par capital flight, export underinvoicing, As with the market allel market parallel premium, premium.11 we divide the export misinvoicing estimates into three categories of the value of total exports): low (less than 10 (as a percent to moderate 15 of exports), and of (10 percent percent exports), 15 For and the United (above Europe, percent). Japan, high in 1948, while calculations start for the States, misinvoicing countries these start in 1970. In the extensive back remaining to this paper, we show, for each episode, which of ground material a score (1 is applicable. the three categories Finally, we construct and 3 for High) for both of these proxies for Low, 2 for Moderate, score on the estimated The combined for leakages. size of the (these range from 2 to 6) is also reported.12 leakages Table shows the evolution of export misinvoicing III, which a of of the value total and the parallel market (as percent exports) across a and (in percent) time, provides regions premium through flavor of the size of potential from the official general leakages our to market. of estimates According misinvoicing (top panel), the regional patterns show the largest leakages for the Caribbean in and non-CFA Sub-Saharan Africa with averages 1970-2001, the 30 to 50 percent of misinvoicing range. The lowest estimates are for Western and the (8 to 11 percent) Europe, North America,
can be made statements introduced. Similar about other crisis that episodes involved the introduction of exchange controls and the segmentation of markets. 11. See Kiguel, and O'Connell contained [1997] and the references Lizondo, therein. 12. See "Part II. Parallel and Dual Markets and Multiple Rate Exchange to A Modern Practices: Material of Exchange Rate Arrange Background History ments: A Reinterpretation" at http:/ I rein lwww.puaf.umd.edu/faculty/papers hart Ireinhart, htm.
12
QUARTERLY JOURNAL OF ECONOMICS TABLE III

Leakages: Export Misinvoicing Value of and the the value Mean 48-^9 12.8 50-59 10.9 Parallel Misinvoicing of exports) absolute 60-69 9.9 value 70-79 24.7 7.2 28.5 23.4 30.7 31.4 14.6 30.8 26.1 46.6 11.6 16.0 (by decade) 80-^89 22.1 8.3 21.7 23.4 16.7 14.9 12.0 48.9 36.0 15.4 7.6 11.4 90-01 26.0 16.1 21.5 53.6 17.4 24.1 10.3 60.0 30.4 7.4 7.7 4.8 70-01 24.4 10.9 23.8 34.1 21.5 23.5 12.2 47.0 30.8 22.1 8.9 10.4 Market Premium Absolute of Export
(as a percent Descriptive Min. World North Africa CFA Rest of Africa Middle East and Turkey Developing Asia and Pacific Industrialized Asia Caribbean Central and South America Central and Eastern Europe Western Europe North America 7.0 2.5 12.6 16.3 9.1 9.5 3.7 9.7 12.0 2.5 2.4 0.6 Max. 39.8 59.9 48.3 201.9 45.4 79.1 18.2 136.0 49.6 50.0 16.9 22.6 statistics
St. dev 8.4 10.3 8.4 33.5 9.6 16.9 3.3 33.2 8.2 18.3 3.0 5.9
11.2
14.2
13.9
14.1 4.6
10.4 9.4
10.0 3.8
average parallel market premium Monthly in percent) (excluding freely falling episodes, statistics (by decade) Descriptive Average Min. World North Africa CFA Rest of Africa Middle East and Turkey Developing Asia and Pacific Industrialized Asia Caribbean Central and South America Western Europe North America Max. St. dev 35.4 41.4 2.7 73.9 99.6 95.0 107.6 42.8 78.5 48.6 3.3 46-^9 137.8 50-59 56.7 9.9 6.9 81.0 60.9 43.0 . 49.1 165.5 7.2 133.0 17.0 0.5 60-69 38.1 35.7 33.7 26.0 168.9 12.0 29.6 16.4 1.2 0.0 70-79 31.3 30.7 0.0 113.7 21.4 44.7 3.6 30.2 18.6 2.0 1.1 80-89 57.8 108.6 1.2 112.7 146.5 43.1 1.3 56.8 74.8 1.7 1.4 90-98 52.6 62.0 1.8 107.7 193.2 12.1 1.5 53.6 8.4 1.2 1.6 46-98 54.1 53.6 0.9 71.0 88.6 72.9 36.1 42.3 51.0 16.9 1.3
11.6 205.9 -1.2 164.8 12.7 -6.4 1.7 322.5 5.1 -3.7 -6.9 -23.8 3.0 -5.6 -4.3 493.1 660.1 815.9 300.0 716.1 347.5 49.7
31.9 54.6 143.5 324.4
Sources: International Monetary Fund, Direction of Trade Statistics, International Financial Statistics, Pick's Currency Yearbook, World Currency Report, Pick's Black Market Yearbook, and authors' calculations. To calculate export misinvoicing, letX^? = imports from country i, as reported by the rest of the world (CIF basis), X? = exports to the world as reported by country i, Z = imports CIF basis/imports COB basis, then export misinvoicing = {Xy^lZ) - Xt. The averages reported are absolute values as a percent of the value of total exports. The parallel premium is defined as 100 X [(P - 0)/0)], where P and O are the parallel and official rates, respectively. The averages for the parallel premium are calculated for all the countries in our sample in each region, as such, it includes countries where rates are unified and the premium is zero or nil.
13
low by the CFA Franc Zone. It is also noteworthy that, although in the export misinvoicing standards of other regions, average in 1948 is half of what it was 1970-2001 for Western Europe the importance 1949. Yet these regional averages may understate in some countries. For example, the maximum of misinvoicing for Western does not value for 1948-2001 (16.9 percent) Europe as a percent of the reflect the fact that for Spain misinvoicing to 36 percent in 1950, a comparable value of exports amounted value to what we see in some of the developing regions. As to the regional shown average parallel market premium in the in the bottom panel of Table all fall III, regions squarely the North of (with range America, exception Moderate-to-High In the case of developing Western and CFA Africa). Asia, Europe, are significantly the averages raised by Myanmar and Laos. It is the averages in worth noting for Europe and industrialized Asia and even higher than those recorded the 1940s are comparable for many the importance of countries, developing highlighting and accounting for dual markets this acknowledging during period. To sum, in this section we have presented evidence that leads us to conclude were as that parallel markets both important indicators of monetary of the prices policy and as representative an important share of economic transactions. It is underlying on the dual or parallel to draw heavily therefore quite reasonable market
which we
data
now
in classifying
turn.
exchange
rate
regimes,
the
task
to
III. The
"Natural"
Classification
Code: A Guide
our classification We would scheme as a "Natural" describe of descriptive statistics and system that relies on a broad variety to group episodes into a much finer grid of regimes, chronologies rather than the three or four buckets of other recent classification new pieces The two most of information important strategies.13 we bring to bear are our extensive data on market-determined dual or parallel rates and detailed exchange country chronologies. The with chronologies for each arrangements
13. species a natural In biology, to group them.
data, the
its sources,
and
are described coverage country along that map of exchange the history rate in the detailed mate country background
taxonomic scheme relies on the characteristics of a
14
rial to this paper. To verify and classify regimes, we also rely on a variety on exchange of descriptive statistics based rate and inflation data from 1946 onwards; the Appendix describes these. III.A. The Algorithm
our Natural III is a schematic Classifi Figure summarizing to sort out for cation algorithm. First, we use the chronologies treatment countries with either official dual or multiple separate or rates if there is no active parallel (black) markets.14 Second, we check to see if there is an official dual or parallel market, such as a peg or band. If there is, we arrangement, preannounced to verify the announced examine statistics summary regime, go If the regime forward from the date of the announcement. is ing rate verified behavior accords with the prean (i.e., exchange as a peg, crawling it is then classified nounced policy), accordingly fails verification peg, etc. If the announcement (by far the most a common we then seek de facto statistical classifica outcome), in and discussed tion using the algorithm described below, in detail the greater Appendix. if there is no preannounced Third, path for the exchange cannot be verified rate, or if the announced by the data regime we rate of inflation is below 40 percent, and the twelve-month rate behavior. As the regime classify exchange by evaluating a variety rate is used, we consider of exchange regards which deutsche the US dollar, anchor currencies including potential euro, French yen, Australian dollar, franc, UK pound, mark, and the Indian rupee. A South African Italian rand, lira, SDR, makes plain that the relevant reading of the country chronologies across but sometimes not countries anchor varies currency only a country over time. (For example, many former British within to the to the UK pound to pegging colonies from pegging switched US dollar.) is based on a five-year moving window Our volatility measure so that the monthly rate for details), (see the Appendix exchange as part of a larger, continuous, behavior may be viewed regime.15
at http://www.puafumd.edu/faculty/ material See background posted Ireinhart, htm. Ireinhart on exchange in a particular rate behavior is based 15. If the classification and devaluation events it is more (such as a one-time year, likely that one-time in or political the year as a change or an economic leads to labeling shock repeg) and Stur For example, is no change. in effect when there Levy-Yeyati regime, one year at a time (with no memory), zenegger [2002], who classify regimes an intermediate as having in 1994, when all CFA zone countries classified regime 14.
papers
15
Are There Dual Unified rate
From Chronologies: or Multiple Rates, or a Parallel
Market? or Dual/Multiple Parallel rates
From Chronologies: Is there an official announcement ?
Statistically classify regime using market determined exchange rates
If (12-month Infiation>40%)
If(12-month Infiation<40%) Classified as De Facto:
Kt}??
Freely falling PASS: Announcement Classified No legal tender Confirmed If (Monthly Inflation > 50%) peg band
Peg
Band
as De Jure: Crawling
Crawling
peg
Currency
board/Peg
Crawling
Hyperfloat
Crawling
band
Peg Band
Moving
band
Moving
band
I Managed float
Freely floating
Managed
float
Freely floating Figure III Classification Algorithm
A Natural
Exchange
Rate
these countries classifies them less likely that it was because that probable
in January had a one-time devaluation ofthat year. Our algorithm as having it The five-year window also makes pegs throughout. as a peg an exchange we classify rate that did not move simply a tranquil no economic or political It is far less shocks. year with over a five-year there are no shocks span.
16
as a check on the We also examined the graphical evidence reason so is to In practice, classification. the main for doing pegs from crawling pegs or bands and to sort the latter separate into crawling bands. and noncrawling as we have already a straightforward but Fourth, stressed, from all previous fundamental classification schemes is departure a new create for countries that we whose separate category cases rate of inflation is above 40 percent. twelve-month These are labeled "freely falling."16 If the country is in a hyperinflation or to the classic Cagan of 50 percent [1956] definition (according we more monthly rate the inflation), regime categorize exchange as a "hyperfloat," a subspecies of freely falling. In Figure IV, rates versus the US dollar are plotted for two bilateral exchange countries that have been classified by the IMF (and all previous over much as floating of the postwar classification efforts) pe the Canadian and Argentina.17 To us, lumping riod?Canada its hyperinflation that of Argentina float with seems, at a during As IV minimum, illustrates, floating regimes misleading. Figure the from freely different look rather regimes?witness falling in the scales between Canada difference orders of magnitude (top in is highlighted of page) and Argentina (bottom). This difference dollar the Canadian dollar-US the middle plots panel, which rate against Argentina's it scale; from this perspective, exchange rate histories of other coun looks like a fixed rate! The exchange if these chronic high inflation bouts?even tries that experienced more to Ar similar did not reach the hyperinflation stage?look our In in IV than to Canada.18 view, regimes Figure gentina control and the atten with an utter lack of monetary associated inflation should not be automatically dant very high lumped as low inflation float rate arrangement under the same exchange to be treated On these grounds, freely falling needs ing regimes. same as a separate in In much that the way Highly category, debted Poorest Countries (HIPC) are treated as a separate "type" of debtor.
cases 16. In the exceptional tion plan) where, inflation despite a confirmed, follows preannounced
of an inflation the beginning stabiliza (usually over 40 percent, rate nevertheless the market takes band or crawl, the preannounced regime
precedence. the Convertibility 17. For Argentina, this of course refers to the period before in April 1991 and for Canada the post-1962 Plan is introduced period. for Chile shown such as that 18. Two-panel V), for each (Figure figures, are found the coun in the background material in the sample alongside country try-specific chronologies.

Canada (1): Log of Market-Determined January 1946-December M 0.4 Exchange Rate 1998
17
1946
1950
1954
1958
1962
1966
1970
1974
1978
1981
1986
1990
1994
1998
Canada (2): Log of Market-Determined Exchange Rate 1998 January 1946-December
inArgentina's
Scale
-5 -10 -15 -20 -25 -30 1946 1950 1954 1958 1962 1966 1970 1974 1978 1981 1986 1990 1994 1998
Argentina:
Log of Market-Determined January 1946-December
Exchange Rate 1998
-15 g I -20
? -25 -30 1946 1950 1954 1958 1962 1966 1970 1974 IV and Falling World Cur 1978 1981 1986 1990 1994 1998 -
Figure The Sources: rency Yearbook, Essential Distinction between Pick and S?dillot [1971]; issues. various
Freely Floating International Currency
Analysis,
18
In step 5 we take up those residual that were not regimes in steps 1 through 4. These classified become candidates regimes or "freely" floating.19 for "managed" To distinguish the between some simple tests (see the Appendix) that look at two, we perform a narrow range, rate will move within the likelihood the exchange as well as the mean value rate changes. absolute of exchange and the parallel market When there are dual or parallel markets or higher, we apply steps 1 10 percent is consistently premium 5 to our data on parallel rates and reclassify exchange through in our finer grid.20 accordingly, though III.B. Using the Chronologies
are also a central The 153 individual country chronologies to In from all efforts of previous classify regimes. point departure information the first instance the data are constructed by culling from annual issues of various sources, including Pick's secondary Pick's Black Mar World Yearbook, Yearbook, Currency Currency the IMF's An International Financial ket Yearbook, Statistics, on Exchange Re and Exchange nual Report Rate Arrangements our Nations Yearbook. and the United strictions, Constructing us to sort and interpret information for every data set required we draw on na above. Importantly, year from every publication data errors or inconsisten tional sources to investigate apparent we rely on the broader economics literature cies. More generally, of to include such as the distribution information, pertinent transactions among official and parallel markets.21 The chronologies allow us to date dual or multiple exchange as between rate episodes, well as to differentiate preannounced pegs, and bands from their de facto counterparts. pegs, crawling to distinguish We think it is important say, de facto pegs between, or or bands from announced their properties because pegs bands, are potentially to provide At the very least, we want different.22 of to ask a variety with the data needed researchers future The rate of about the role arrangements. exchange questions
of "independently is the analogue of "freely floating" 19. Our classification in the official classification. floating" is consistently 20. When the parallel market (i.e., all observations premium all these cases in single digits, we find that in nearly the five-year within window) rates yield the same classification. and parallel the official 21. See Marion [1994], for instance. at least, the two. In theory, between 22. Policy-makers may not be indifferent device which, and so on can act as a coordinating announcements of pegs, bands, could invite attacks. of being more transparent, speculative by virtue
EXCHANGE RATE ARRANGEMENTS also flag the dates for important chronologies as when rate first floated, the exchange
currency was changed.
19 points, such the anchor
turning or when
IV gives an example of one of our 153 chronologies (see for the case of Chile. The first column gives material) background as far back as critical dates. Note that we extend our chronologies in (even though we can only classify from 1946 onwards); possible the case of Chile we go back to 1932. Table The Primary Natural official second column classification is classified. lists how the arrangement to our refers to the classification according or may which not correspond to the may
algorithm, in parentheses in the second IMF classification (shown are of Table and tertiary column classifications IV). Secondary as to meant information, only provide supplemental appropriate. from November 1952 until April 1956, Chile's So, for example, inflation was above 40 percent, and hence, its primary classifica tion is freely falling?that that matters is, the only classification in for the purposes of the Natural For those interested algorithm. we also note in that column additional that the detail, however,
rate was a managed market-determined float along the exchange in the Appendix in detail lines described and that, (secondary) Chile had multiple rates This furthermore, exchange (tertiary). information for example, additional for research may be useful, ers who are not interested cases in treating the high inflation In this case, they would have (as we have done here). separately in the 1952-1956 sufficient to place Chile in information period the managed float category. Alternatively, for those researchers as a to treat dual or multiple rate practices who wish exchange these arrangements separate category altogether (say, because involve capital the second column (under sec controls), usually the relevant informa classification) ondary or tertiary provides tion to do that sorting accordingly. Chile unified rates on September As one can see, although 1999, throughout erate that termined, some form of dual or multiple it previously had rates we reit most of its history. In these circumstances, our classification relies on the market-de algorithm rather than the official exchange rate.23 Over some
23. The IMF official
other Chronologies classification for
do not contain this in the the countries
but information, is posted sample
the annual at http:/1
www.puaf.umd.edu/faculty/paperslreinhart/reinhart.htm.
TABLE IV
A Sample Chronology in the Natural Classification Scheme:
Chile
Date September 16,1925-April 20,1932 Peg
Classification primary/secondary/tertiary in parentheses) (official IMF classification
Gold stand
April 20,1932-1937 1946 1937-February March 1946-May 1947 June 1947-October 1952 November 1952-April 16,1956 1957 April 16,1956-August September 1957-June 1958 1,1960 July 1958-January 15,1962 January 1,1960-January 1964 January 15,1962-November December 1964-June 1971 Wune July 197 29,1976 1978 1978
Dual market Managed floatin^Multiple rates Freely falling/Managed floating/Multiple Managed floating/Multiple rates Freely falling/Managed Freely falling/Managed
July 30,1 Pound Ster standard US dollar b rates
floating/Multiple rates floating/Dual market Managed floating/Dual market Freely falling/Managed floating/Dual market Peg to US dollar Freely falling/Managed floating/Multiple rates rates (Peg) Managed floatingftlultiple Freely falling/Multiple exchange rates (Peg through 1973-managed floating afterwards) Freely falling/Crawling peg toUS dollar (Managed floating) Preannounced crawling peg to US dollar/Freely falling (Managed floating) Preannounced crawling peg toUS dollar (Peg) Peg to US dollar (Peg) Freely falling/Managed floating/Dual market Managed floating/Dual market (Managed floating)
Rate struct
The escudo
Freely falli
On Septemb October
June 29,1976-January February 1978-June
The Tablita
July 1978-June 30,1979 June 30,1979-June 15,1982 1982 June 15,1982-December January 1983-December 8,1984
The Tablita The second
Parallel ma 1983. On was anno
TABLE IV
(continued) Classification primary/secondary/tertiary in parentheses) (official IMF classification 1988 1, 1989 Managed floatingflDual market (Managed floating)
Date December February 8,1984-January 1988-Januaiy
De facto crawling band around US dollar/Dual market (Managed floating)
PPP rule. Th band to US PPP rule. ?5
band to US the preann remain in
January
1,1989-January
22,1992 20,1997
January 22, 1992-January
Preannounced crawling band around US dollar/Dual market (Managed floating) De facto crawling band around US dollar/Dual market (Managed floating)
PPP rule. Ba
PPP rule. Ba ?10% cra below 15
January 20,1997-June June 25,1998-September September December September
25,1998 16,1998 22,1998 2,1999 2001
16,1998-December 22,1998-^September 2,1999-December
De facto crawling band toUS dollar/Dual market (Managed floating) Preannounced crawling band to US dollar/Dual market (Managed floating) Preannounced crawling band toUS dollar/Dual market (Managed floating) Preannounced crawling band to US dollar/Dual market (Managed floating) Managed floating (independently floating)
Official prea de facto b ?2.75% ban
?3.5% band ?8% band.
Rates are un
Reference currency is the US dollar. Data availability: Official rate, 1900:1-2001:12. Parallel rate, 1946:1-1998:12.
22 periods
QUARTERLY JOURNAL OF ECONOMICS the discrepancy to be proved between the official and
rate, parallel 1992 however, example, January onwards the parallel market in remained premium single digits, and our algorithm little difference whether shows that it makes we leave the official or parallel rate is used. In these instances, the notation in the second column that there are dual rates (for small. For from information but also note in the third column that the purposes), is in single digits. As noted, Chile has also experienced premium ex the twelve-month several inflation periods where monthly ceeded 40 percent. Our algorithm these automatically categorizes as freely falling exchange rate regimes?unless there is a prean as was nounced peg, crawling peg, or narrow band that is verified, was on the case when introduced the Tablita program February 1978. in our chronology The third column further sundry gives on the regime?e.g., of the announced information the width and a crawling band de facto bands, etc. For Chile, which followed to note it is particularly interesting subperiods, policy over many over time in the width of the bands. The third column the changes also
market
includes
premium
information
and
about
developments
reform. As an
in the
example
parallel
of the
currency
former, we note that since 1992 the parallel premium slipped of the latter is given for Chile when single digits; an example in 1975. the escudo peso replaced The top panel of Figure V plots the path of the official rate for Chile from 1946. It is market-determined exchange
into the and evi
shown the arrangement of the period dent that through much was one of a crawling the rate of peg or a crawling band, with as inflation time and notably crawl varying slowing through to stabilize the Tablita plan of the early 1980s. following began The bottom This (in percent). premium panel plots the parallel market in our of countries other is many pattern representative in economic and of the the premium periods skyrockets sample; as credible into declines policies instability, single digits political are put in place and capital controls are eased. As we will discuss case is also illustrative, in that the Chilean in the next section, are quite or bands common. pegs VI, which Figure crawling rate for the Philippines, shows the path of the exchange India, of of the other and Greece, crawling plethora examples provides pegs or bands in our sample.

Official and Market-determined Rates
23
Exchange
1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998
Monthly
Parallel Market
Premium
800
1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998
Figure Chile: Official and Market-Determined Market V Rates and the Parallel Exchange Premium
1998 1946-December January on Exchange Sources: International Fund, Annual Monetary Report Arrangements Pick and S?dillot Financial and International and Exchange Restrictions Statistics; World Currency various issues. Yearbook, Analysis, [1971]; International Currency
24

Philippines: Log of Market-Determined August 1949-December Exchange 1998 Rate
I40 I 3.5
D ? 3.0
2.0
I" I 1.0
J 0.5
yu^-A^
1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997
1949
India: Log of Market-Determined January 1946-December
Exchange Rate 1998
1946
1950
1954
1958
1962
1966
1970
1974
1978
1981
1986
1990
1994
1998
& 6.0
Greece: Log of Market-Determined January 1954-December
Exchange Rate 1998
1954
1958
1962
1966
1970
1974 Figure VI
1978
1981
1986
1990
1994
1998
The Sources: rency Pick Yearbook,
Prevalence
and S?dillot [1971]; issues. various
of Crawling and Bands Pegs International Analysis, Currency
World
Cur
EXCHANGE RATE ARRANGEMENTS TABLE V

The Fine and Coarse Grids of the Natural Classification Scheme Number assigned category Fine Natural No separate Preannounced Preannounced legal tender classification 1 1 board that arrangement is narrower 2 1 than or equal bucket
25
to in:
Coarse
grid
grid
peg or currency horizontal band
to ?2%
De facto peg Preannounced
3 1
4 1 crawling crawling peg 5 2 that band is narrower than or equal
Preannounced
to ?2%
De facto De De facto facto
6 2
crawling 2 8 10 3 11 3
peg 7 2 than or equal to ?2% band that is narrower crawling that is wider than ?2% 9 2 Preannounced band crawling band crawling band that floating floating falling 13 12 4 hyperfloat) 14 5 that 3 is narrower than than is narrower or equal or equal to ?5% to ?2%a
Noncrawling Managed Freely Freely
(includes
Source: The authors. a. By contrast to the common crawling bands, a noncrawling band refers to the relatively few cases that allow for both a sustained appreciation and depreciation of the exchange rate over time. While the degree of exchange rate variability in these cases is modest at higher frequencies (i.e., monthly), lower frequency symmetric adjustment is allowed for. The Appendix provides a detailed discussion of our classification algorithm.
III.C.
Alternative
Taxonomies: our
Comparing
the Basic
Categories
of exchange rate arrangements taxonomy Altogether, includes the fourteen classifications sketched in Table V (or fif are treated as a separate teen if hyperfloats Of course, category). are not exhaustive, fourteen buckets if for example, (or fifteen) one wishes to distinguish between and backward-look forwardand Giannini ing crawls or bands, along the lines of Cottarelli that we are covering the entire post-World War II [1998]. Given we did not have to information make of that kind period, enough finer distinction. because we sometimes want to com Conversely, coarser we with the official pare our classification one, regime also five show how to collapse our fourteen into types of arrangements see Table V, where broader the least flexible categories; are assigned the lowest values in our scale. arrangements
26
QUARTERLY JOURNAL OF ECONOMICS In the finer grid, we distinguish between preannounced pol icies and the less transparent de facto regimes. Since the former an explicit involve announcement while the latter leave it to financial market to determine rate the analysts implicit exchange we in as the finer classification treat policy, preannouncement less flexible a num than de facto. We accordingly it lower assign ber in our scale. Those an not interested in testing whether serve as a coordinating nouncements a device to make (say, more attack and in interested out speculative likely) only sorting of observed the degree rate flexibility will prefer exchange coarser grid. However, even in the coarse grid, it is imperative treat freely falling as a separate category. the to
IV. The
"Natural"
Taxonomy:
Critiques
and Comparisons
our classification As the previous section described, strategy on the observed relies importantly behavior of the market-deter some poten mined rate. In this section we first address exchange a tial critiques of our approach, in whether including country's reserve behavior ternational should affect its classification, and we may be mislabeling as pegs or crawls some regimes whether to to compare due the absence of shocks. We then simply proceed our results with the "official history," and provide of examples some of the existing how our reclassification evi may reshape on the links between rate arrangements and dence exchange various facets of economic activity. TV.A. The Trilogy: Exchange Controls Capital Rates, Monetary Policy, and
rate arrangement, of any exchange the nuances To capture on the presence one might and effective information also want or unsteril ness of capital of (sterilized the modalities controls, to which and the extent ized) foreign intervention, exchange rates interest (or other less conventional types of intervention) rate. Since, for the are used as a means to stabilize the exchange on the our classification rests squarely of universality, purposes rates of the nominal time series behavior univariate exchange we in subsection this with historical (combined chronologies), our some to limitations of these address approach. rate arrangements Some studies have reclassified exchange reserves as of in the behavior foreign exchange by also factoring
27
Financial How Statistics.24 reported by the IMF's International reserves and Reinhart has [2002] note, using ever, as Calvo In Brazil and in over two dozen other coun serious limitations. market intervention is frequently done tries, foreign exchange sales and of dollar-linked domestic debt.25 through purchases in the widely This debt is not reflected used IFS reserve data, interventions in neither were the massive of the Thai authorities 1997 and in South Africa thereafter. liberalization has Furthermore, spread throughout the globe, there has been a widespread switch from direct inter to the use of interest in the foreign exchange market rate vention means as a in to the 1990s stabilize the rate.26 policy exchange the Picking up on this kind of policy intervention requires having interest of rate?the the federal rate funds for equivalent policy the United States?for each country. Such data are very difficult to come by, and none of the other efforts at reclassification have issue. dealt with issues arise in the context of the links between mone Other rate policy. and exchange In particular, controls, tary, capital rate (or having narrow bands, or crawl while fixing the exchange ing pegs, or bands) largely defines monetary policy, our two most or freely floating) flexible do arrangement categories (managed the forward market during as financial not. Floating with monetary could be consistent interest targets, or inflation rate targets, the latter being a relatively targeting, our study dates recent phenomenon.27 Since back to 1946, it a sea in re controls and spans change capital monetary policy and it is beyond the scope of this paper gimes, framework for the most flexible monetary policy to subdivide arrangements the in
24. For instance, the algorithm used by Levy-Yeyati and Sturzenegger [2002] uses the exchange and base money. This gives rise to (besides rate) reserves cases of what not available." variable This many they refer to as "one classification means a classification that their algorithm cannot provide for the United Kingdom to imagine it is hard such data problems) until 1987 and?in the most (where extreme of cases?some countries cannot be classified for any year over developing their 1974-2000 sample. 25. See Reinhart, and Savastano of [2003] for a recent Rogoff, compilation on data domestic dollar-linked debt. are plenty 26. There of recent where interest rates were examples jacked up to fend off a sharp depreciation one of the in the currency. aggressively Perhaps more obvious in is the wake of the Russian in August default examples 1998, when came under pressure market currencies and countries like Mexico many emerging rates a span of interest them to 40 percent) within responded by doubling (raising a couple of weeks. 27. Indeed, several of the inflation in our sample (United Kingdom, targeters as managed floaters. it must also etc.) are classified Canada, Sweden, (However, be acknowledged that there are many different variants of inflation targeting, in markets.) especially emerging also
28
our study our grid. Apart rate policy, however, from exchange sheds considerable light on the third leg of the trinity?capital has not been the goal controls. While measuring capital mobility show that the parallel market of this paper, our data consistently inte with dwindles into insignificance capital market premium a promising measure of capital continuous providing gration, mobility. IV.B. Exchange Rates and Real Shocks
rate between like to distinguish exchange Ideally, one would its actions direct from deliberate (whether policy stability arising or interest rate policy, as intervention foreign exchange market or to economic the absence of and discussed) stability owing we if the evidence In this shocks. subsection that, provide political in our de jure rate is stable and it is accordingly treated exchange of not due to an absence it is typically to classification, approach
shocks.
are a natural source of potential shocks the countries. for many Similarly, shocks, particularly developing in the is likely to be reflected of shocks (or absence) presence and size of the incidence of real GDP. To investigate volatility terms of trade terms of trade shocks, we constructed monthly over the period 1960-2001.28 The terms series for 172 countries a of commodity is of trade series average weighted geometric based on the exports of 52 commodities). (fixed weights prices a summary of the individual VI Table by region presents share of commodi the shows first column The country findings. a Atot denotes of the the variance ties in total exports, while the of terms of trade in the region particular change monthly as it is both a Australia is our benchmark, to Australia. relative and has a floating that is a primary exporter commodity country an optimal some rate estimates, approximates that, by exchange Terms of trade to terms of trade shocks [2003]). (see Chen and Rogoff response of the monthly show the variance The next three columns change to Australia in the terms of trade of the region relative (a Atot), to Australia rate of the individual (a Ae) region relative exchange of the in real GDP of the annual and the variance region change show the last two columns to Australia relative (a Ay). The
28.
Table
Spilimbergo
VI is based [2003].
on the more
extensive
results
in Reinhart,
Rogoff,
and
EXCHANGE RATE ARRANGEMENTS TABLE VI

Terms Variance of Trade, and Exchange Output, to Australia Ratios (Normalized Falling Episodes) Rate and Variability Excludes Freely
29
cr Region North Rest Middle Africa of Africa East Asia/Pacific Asia (excluding CFA) Share 0.51 0.56 0.60 0.34 0.18 0.50 America America East Europe 0.62 0.63 0.24 0.18 0.33 cr Atot 3.29 2.92 4.15 2.02 0.82 4.15 3.02 2.03 0.60 1.75 1.64 Ae 0.93 2.87 0.95 0.85 0.97 0.67 0.49 1.08 1.03 0.84 0.60
cr Ay 2.54 2.50 3.48 2.40 1.15 2.40 2.11 2.15 1.51 1.25 1.12
a Ae cr Atot 0.64 1.29 0.33 0.54 1.23 0.20 0.21 0.66 1.66 0.76 0.47
cr Ae a Ay 0.23 1.38 0.50 0.44 0.86 0.35 0.28 0.52 0.78 0.56 0.54
Development Industrialized Caribbean Central South Central Western North
Europe America
Source: Reinhart, Rogoff, and Spilimbergo [2003] and sources cited therein. The variable definitions are as follows: Share = share of primary commodities to total exports; the next three columns show the variance of the monthly change in the terms of trade of the region relative to Australia (aMot), the variance of the monthly change in the exchange rate of the individual region relative toAustralia (a Ae), and the variance of the annual change in real GDP of the region relative toAustralia (a Ay); the last two columns show the variance of the exchange rate relative to the variance of the terms of trade (crAe)/(cr ?tot) and output (ct Ae)/(cr ?y), respectively.
variance of the exchange rate relative to the variance of the terms of trade (a Ae)/(a Atot) and output (a Ae)/(a Av), respectively. A priori, adverse terms of trade shocks should be associated with depreciations and the converse for positive terms of trade in the terms of trade should go hand shocks; greater volatility in-hand with greater volatility in the exchange rate. (In Chen and even under optimal pol [2003] there is greater Rogoff volatility several (a) most icy.) Table VI reveals empirical regularities: more variable countries have terms of trade than Aus (regions) some cases, tralia?in such as the Middle East and the Carib as as or as much three four times (b) real GDP is bean, variable; also commonly far more volatile coun than in Australia; (c) most tries' exchange rates appear to be far more stable than Austra lower variances for most of the lia's, as evidenced by relatively from the previous the last two (d) following groups; observations, columns show that for most of the country that the groupings variance of exchange rate changes is lower than that of changes in the terms of trade or real GDP. Taken together, the implication of these findings is that if the exchange rate is not moving, it is
30
QUARTERLY JOURNAL OF ECONOMICS course, terms of trade are only one class movement in the exchange rate. Thus, and economic, domestic, shocks?political here. only reinforce the results presented and Artificial?
not for lack of shocks. Of of shocks that can cause other kinds of considering and international?would TV.C. Fact We and Fiction:
Natural
are now prepared to contrast the official view of the of rate with the view that from emerges history regimes exchange our alternative To facilitate employing methodology. compari on the coarse grid version focus mainly of the sons, we will Natural system. some of the key differences between the Figure VII highlights Natural and IMF classifications. The dark portions of the bars denote the cases where there is overlap between the IMF and the Natural The white bar shows the cases where the classification.29 IMF labels the regime in one way and (say, a peg in 1970-1973) the Natural labels it differently. the striped portions of Finally, the bars indicate the cases where the Natural labels classification the regime in one way and the 1991-2001) (say, freely falling, IMF labels differently in As shown (say, freely floating). Figure to our Natural classification 40 about VII, according system, were of in 1950 all countries (since pegs many percent regimes as pegs). Figure VII had dual/parallel rates that did not qualify were also makes plain that some of the "pegs" in our classification not considered in turn, our the official classification; pegs under algorithm rejects almost half of the official pegs as true pegs. Our reclassification of the early postwar years impacts not only on as well; but on industrialized countries countries, developing all the European nearly after World War II. A second reason why countries our scheme had active parallel markets
shows fewer pegs is that the to declare their regimes countries IMF's pre-1997 scheme allowed as "pegged to an undisclosed basket of currencies." This notably nontransparent popular during the 1980s, practice was especially and it was also under this that a great deal of managed floating, took place. and freely falling actually freely floating, For the period 1974-1990 the official classification has our as has 60 of all classification pegs; percent regimes roughly as as we see in this half many. Again, Figure VII, comparison only
29. country both particular classifications year to the the assigned same category. for a particular
Specifically, in a given
regime

? According According Overlap to Natural but Not IMF
31
to IMF but Not Natural of IMF and Natural
1970-1973 1950 Figure Comparison of Exchange Rate Natural Arrangements Classifications, VII
1991-2001 1974-1990
According 1950-2001
to the
IMF Official
and
on Exchange International Sources: Fund, Annual Monetary Report Arrange ments Pick and and Exchange and International Financial Restrictions Statistics; vari S?dillot International World Yearbook, [1971]; Currency Analysis, Currency ous issues. (i.e., white classification dark bars show the overlap between the IMF and Natural the for that particular the IMF and Natural classifications year coincide); in one the IMF classification labeled the regime bars show the cases where it differently; classification labeled and the Natural way (say, a peg in 1974-1990) the Natural classification labeled the the striped bars the cases where indicate it differently, in one way and the IMF labeled (say, regime (say, freely falling) freely floating). The
the differences since some of our pegs are not official versa. For vice the and 1991-2001, and years pegs 1974-1990, one can see two major to trends. First, "freely falling" continues 12 for of all be a significant category, accounting percent regimes from 1991-2001. from 1974-1990, of all regimes and 13 percent in the 1990s, over 40 percent of the For the transition economies are in the freely falling category. Of course, what we observations understates reporting future Clearly, are in Figure research VII is the incidence could use GDP weights of each and?given regime. that
32 low-income
QUARTERLY JOURNAL OF ECONOMICS countries are disproportionately would reveal category?this in the represented a lower importance to
freely falling this category.30 scheme reveals a bunching the Natural classification Second, com rate flexibility, in terms of exchange when to the middle Limited of the world. with the official monetary history pared the Natural classification is dominated under flexibility?which more de facto notably important. pegs?becomes by crawling a very small the the official class under From being scheme, to the limited flexibility elevates Natural classification algorithm over the past decade, just behind second most important grouping of is the reduced difference pegs. Another importance startling more to the official classification, than freely floating. According 1991 30 percent of countries were during independently floating less than 10 percent 2001. According to the Natural classification, were freely floating. This is partly a manifestation of what Calvo but equally because and Reinhart [2002] term "fear of floating," ones that are officially we assign high inflation floats (including new our countries to Indeed, more freely falling category. "pegs") ex rates than had had freely falling freely floating exchange change rates! classification the IMF and Natural between The contrast sees one even more when becomes just how striking systems the two classifications is between small the overlap country by in Table VII, if the IMF and year by year. As shown country a there is a 44 is of the peg (1970-2001), regime designation will place it into a more that our algorithm percent probability is a float, there is a 31 If the official regime flexible arrangement. a as we it will categorize chance peg or limited flexibility. percent a is If the official regime float, there is a 53 percent managed our it as a peg or limited flexi will categorize chance algorithm a is float or peg, it is virtually the official regime bility. Whether will yield the same a coin toss whether the Natural algorithm of the table gives The bottom result. with two between the classifications, 4 to 1 from (independently (peg) running from 1 (peg) ural classification running is only 0.42. coefficient correlation simple correlation the pairwise the official classification and the Nat floating), to 5 (freely falling). As one can confirm The from
of course, and population 30. GDP weights very would, present weights increase and Japan alone would the United States For example, different pictures. while if it were GDP weights, share of floaters the world's weight by population alone. of fixers by China the weight increase would
EXCHANGE RATE ARRANGEMENTS 33 TABLE VII

Floating Pegs and Pegged Floats: Revisiting the Past, 1970-2001 In Conditional "Other" probability that the regime classified conditional conditional is: percent "Peg" by IMF on being on being 42.0 44.5
on being to NCa conditional according to NC "Peg" or "Limited Flexibility" according classified by IMF 53.2 "Managed Floating" to NC "Peg" or "Limited according Flexibility" classified Pairwise
"Independently Floating" by IMF 31.5 correlation between IMF and NC classifications
Sources: The authors' calculations. a. NC refers to the Natural Classification; "Other"according toNC includes limited flexibility, managed floating, freely floating, and freely falling.
the chronologies, the greatest overlap occurs in the classification ar and of the limited flexibility of the G3 currencies European and especially in developing Elsewhere, rangements. countries, as we shall see. the two classifications differ significantly, IV.D. The Pegs That Float
since January Figure VIII plots the parallel market premium 1946, in percent, for Africa, Asia, Europe, and Western Hemisphere. As is evident from the Figure VIII, for all the regions except Europe, it would be difficult to make the case that the breakdown of Bretton
Woods was a singular event, let alone a sea change.31 For the
in the volatilities developing world, the levels of pre- and post-1973 market-determined rate, as revealed by the parallel mar exchange are remarkably ket premium, similar. Note that for all regions, we exclude the freely falling episodes that would increase significantly the volatility but also distort the scale. To give a flavor of the variation within cross-country region and across time, the dashed line plots the regional average plus one standard deviation (calcu lated across countries and shown as a five-year moving average). As regards Europe, the with the characterization of of when true exchange rate From 1946 until the arrival not floating in the modern story told by Figure VIII is consistent the Bretton Woods system as a period was short-lived. stability remarkably of the late 1950s, while Europe was sense?as were not most currencies
allows
31. We the plot us to aggregate
premium across
rather countries
than the market-determined in comparable units (percent).
rate,
as
it
34
Figure
VIII
Premium: 1946-1998 Parallel Market Monthly Average on Exchange Sources: International Arrange Fund, Annual Report Monetary Pick and Financial and International ments Restrictions and Exchange Statistics; vari World International S?dillot Yearbook, Currency [1971]; Analysis, Currency ous issues. while market the average The solid line represents premium monthly parallel devia of plus one standard line shows the five-year the dashed average moving are calculated the freely tion. The regional falling episodes. averages excluding
EXCHANGE RATE ARRANGEMENTS 35 convertible?it had some variant of de facto floating the under rates. official rates of time Each official guise exchange pegged are realigned, in the parallel the story had already unfolded market the volatility of the (as shown earlier in Figure II). While the official rate and the market rate is not gap between exchange in the developing observed quite in the order of magnitude world, the volatility of the parallel rate is quite similar to the volatility or freely floating of today's managed rates.32 exchange are cases There that illustrate that little many clearly before and after the breakup of Bretton Woods.33 changed is required to make cate Clearly, more careful statistical testing a statements about when structural break took gorical place; but it is obvious from the figures that whatever break might have move taken place hardly lives up to the usual of the from image rates. fixed to flexible
IV.E.
The Floats
That
Peg
a general IX provides flavor of how exchange rate Figure over across has time and evolved The flexibility regions. figure of the probability that the averages plots five-year moving a 2 in rate the remains within monthly percent change exchange and Western percent band for Africa, Asia, Europe, Hemisphere a pegged ar under States). only the United Hence, (excluding no adjustments to the parity, these proba rangement, assuming should equal 100 percent. As before, we exclude bilities the freely For comparison the figures purposes, falling episodes. plot the the unweighted averages unweighted averages regional against for the "committed floaters." floaters include the (The committed rates the dollar: Yen, DM following exchange against (euro), Australian dollar, and the UK pound.) The dashed lines, which one standard show plus/minus deviation around the regional the between differences the averages, highlight group of floaters and the regional averages. It is evident for all regions the least to Africa) (this applies that the monthly variation in the rate has percent exchange
32. See Bordo and Bordo Woods [1993] on Bretton [2003] on a historical on the evolution of exchange rate arrangements. perspective 33. The country-by-country in "The Country and Chart figures Chronologies to A Modern Material of Exchange Rate Arrangements: book, Background History A at Reinterpretation" http://www.puaf.umd.edu/faculty/papers/reinhart/ are particularly reinhart.htm in this regard. revealing
36
Figure Absolute Percent Change Monthly a ?2 Percent within Observations
IX
in the Exchange Rate: Percent of Band average) {five-year moving on Exchange Sources: International Fund, Annual Monetary Report Arrange ments and Exchange Restrictions Pick and and International Financial Statistics; S?dillot World vari [1971]; International Yearbook, Currency Analysis, Currency ous issues. The solid line represents the average for the group while one standard deviation. The regional averages plus/minus ing the freely falling episodes. the dashed lines show are calculated exclud
37
to a minimum?there been kept is a great deal of typically com of exchange rate fluctuations in all regions when smoothing with the usual variations of the committed float pared monthly ers. The smoothing is most in Asia where evident the index around 90 percent for most hovers of the period, versus 60-70 over for the floaters. nature the of the percent Hence, time, classification has as a evolved from problem labeling something as to when it is when the peg not, labeling something floating of rate in has been fact limited. degree exchange very flexibility rV.F. Does the Exchange Rate Regime Matter?
The question of whether the exchange rate arrangement matters for various facets of economic activity has, indeed, been a on interna issue over the years in the literature far-reaching tional trade and finance, and is beyond the scope of this paper. In we present a few simple this subsection exercises that do not causal patterns between rate regimes speak to possible exchange as illustrative and economic but are meant of the performance, of our classification. usefulness consider Table potential First, markets from all the other VIII, which separates dual/parallel where the "exchange rate is unitary," to employ the regimes of the IMF. The top row shows average inflation rates language and real per capita GDP growth for the period 1970-2001 for dual from all other This arrangements separately regimes. two-way alters the picture presented split drastically by the IMF's classi in the top and fourth rows of Table fication does not IX, which
TABLE VIII
Inflation A Comparison of Dual and per Capita Real GDP Growth: Exchange Rate Systems, and Unified (or Multiple) 1970-2001
Average
annual
Average
per
capita
Regime
Unified Dual exchange (or multiple) rate exchange rates 19.8
inflation rate
1.8 162.5 0.8
real GDP growth
Sources: International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Re strictions and International Financial Statistics, Pick and S?dillot [1971], International Currency Analysis, World Currency Yearbook, various issues. The averages for the two regime types (unified and dual) are calculated on a country-by-country and year-by-year basis. Thus, if a country has a unified exchange rate formost of the year, the observation for that year is included in the averages for unified rates; if in the following year that same country introduces a dual market (ormultiple rate) formost of the year, the observation for that year is included in the average for dual rates. This treatment allows us to deal with transitions across regime types over time.
38
QUARTERLY JOURNAL OF ECONOMICS TABLE IX

Do Growth, Inflation, Classifications and Trade Matter? across Regimes: 1970-2001
Classification IMF Official Natural
scheme
Peg
Average
Limited flexibility
annual
Managed floating
rate
Freely floating 173.9 9.4
Freely falling n.a. 443.3 n.a. -2.5 n.a. 57.1
inflation
38.8 15.9
Average annual per
5.3 10.1
capita
74.8 16.5
real GDP growth
IMF Official Natural

Exports
1.4 1.9
plus imports
2.2 2.4
as a percent
1.9 1.6
of GDP
0.5 2.3 60.6 44.9
IMF Official Natural
69.9 78.7
81.0 80.3
65.8 61.2
Source: International Monetary Fund, World Economic Outlook. An n.a. denotes not available. The averages for each regime type (peg, limited flexibility, etc.) are calculated on a country-by-country and year-by-year basis. Thus, if a country has a pegged exchange rate for most of the year, the observation for that year is included in the averages for pegs; if in the following year that same country has a managed float formost of the year, the observation for that year is included in the average for managed floats. This treatment allows us to deal with transitions across regime types over time.
as a separate markets Dual (or multiple) category. are an rate associated with inflation average episodes exchange mar rate of 163 percent versus 20 percent for unified exchange one is lower for dual arrange percentage kets?growth point treat dual ments. The explanation for this gap between the outcomes shown in Table VIII and the IMF's in Table IX is twofold. 62 First, were cases associ of the 1970-2001 percent freely falling during or dual or multiple rates. ated with parallel markets exchange cases classified the high inflation Second, by the IMF as freely to the freely falling category Natural classi floating were moved in the results fication. Again, we caution against overinterpreting as exchange controls and dual of causality, Table VIII as evidence are often introduced and economic amid political cri markets ses?as in Argentina the recent controls (2001) and Venezuela (2003) attest. to the IMF, only limited IX highlights, As Table according cases record moderate inflation. On the other hand, flexibility cases inflation the best record (9 performance freely floating ex in the Natural classification. Freely falling regimes percent) versus an an average rate 443 percent inflation annual hibit inflation categories average (Table in the IX). 9 to 17 percent range for the other

16000
39
m IMFOfficial
O Natural
14000
12000 10000 8 1 8000

6000
4000 2000
a*
Limited Flexibility
Managed float X Regime regions)
Freely floating
Freely falling
Figure PPP Adjusted GDP per Capita (averaging over
across all
Types:
1970-2001
is also significant both in terms of the level of The contrast and X) per capita GDP per (Figure XI and capita growth (Figure income lowest has the Table (US IX). Freely per capita falling to the earlier of that any category?highlighting $3,476) parallel the has is an apt one?while debtor the HIPC freely floating IMF classification, In the official limited (US $13,602). highest was of which almost entirely European comprised flexibility, shows the largest per capita income. countries, is negative for the freely falling cases (-2.5 percent) Growth versus rates in the 1.6-2.4 range for the other percent growth is a separate the differ Once freely falling category, categories. our other classifications to the differ ences between pale relative In the and all others between (Table VIII). freely falling a IMF classification, shows meager average floating freely cases. rate of 0.5 percent for the independently floating growth rate the For the Natural average classification, quadru growth to 2.3 percent. this exercise high Clearly, ples for the floaters ences official lights the importance of treating the freely falling episodes separately.
40

MFOffieW ONMnri
ElllllJI
i &0
Peg
Limited Flexibility
Maniged float
Freely floating
Freely failing
Figure XI
Real per Capita GDP Growth (averaging across over all Regime regions) Types: 1970-2001
on Exchange Sources: International Fund, Annual Monetary Report Arrange ments and Exchange Restrictions and International Financial Pick and Statistics; vari S?dillot International World Yearbook, [1971]; Currency Analysis, Currency ous issues. The averages for each regime etc.) are calculated type (peg, limited flexibility, on a country-by-country and year-by-year if a country basis. Thus, has a pegged rate for most in the of the year, the observation for that year is included exchange if in the following for pegs; has a managed float year that same country averages in the average for most is included of the year, the observation for that year for us to deal with across treatment floats. This allows transitions regime managed types over time.
V. Concluding
Remarks
across all countries to our Natural classification, According 45 percent for 1970-2001, of the observations labeled as officially a "peg" should, as in fact, have been classified limited flexibility, or freely Post worse, managed floating?or "freely falling." a new type of misclassification Bretton Woods, problem emerged, and the odds of being officially labeled a "managed float" when was a or there de facto peg peg were about 53 percent. crawling We thus find that the official and other histories of exchange can be profoundly as a striking rate arrangements misleading, as floats, number of pegs are much better described and vice
versa.
misclassification problems may cloud our view of his some basic dimensions. the IMF's classification tory along Using These
41
one would for the period 1970 to 2001, for instance, that conclude a freely floating a rate not is attractive very exchange option?it an average inflation rate of 174 percent annual and a produces rate of 0.5 percent. This is the per capita growth paltry average worst of Our classification any arrangement. pre performance an average sents a very different in free floats deliver picture: that is less than 10 percent flation (the lowest of any exchange rate arrangement), and an average rate of 2.3 per capita growth we find that unified rate percent. Equally importantly, exchange dual or multiple rate ar vastly outperform regimes exchange one cannot necessarily these dif rangements, although interpret we have focused as causal. While ferences in this paper on the rate arrangement classification issue, the country his exchange conse in this paper may well have tories and data provided for theory and empirics the quences forward, going especially issue of accounting for dual an parallel markets. of the IMF de Vries In her classic history [1969] looked back at the early years of the Bretton Woods regime and noted:
Multiple Fund were one of the first problems that faced the common been its most in the probably problem rates. An number and field of exchange impressive of coun diversity in the last one form or tries have with years twenty experimented another the Fund has called at currency of what multiple practices, . The least transactions.. for a few if not most of their of problem seems at an end. rates, then, never multiple entirely exchange in 1946, and rates have
since this history was written, and years have passed Thirty-four are showing no signs of becom rate practices multiple exchange 2001 Argentina ing pass?. On December suspended convertibility the market for foreign and, in so doing, segmented exchange, on February while strict new ex introduced 7, 2003, Venezuela a multiple facto creating rate sys change controls?de exchange tem. Some things never change. of the
Appendix: This
The Details
"Natural"
Classification
the details describes of our classification appendix algo is which in outlined III Section of the paper. We concen rithm, trate on the description of the fine grid as shown in Table V. A. Exchange Rate Flexibility Indices and Probability Analysis
Our judgment about the appropriate rate classifi exchange cation is shaped mea the time-series of several by importantly
42 sures
of exchange rate variability, based on monthly observations over two-year and five-year The averaged rolling windows. of these measures is the absolute in the percent change rate. We prefer nominal the mean absolute monthly exchange to the variance to minimize the impact of outliers. These change outliers arise when, for example, there are long periods in which rate is fixed but, nonetheless, the exchange to rare but subject devaluations. large are kept within a To assess whether rate changes exchange we re that the rate the calculate band, probabilities exchange a plus/minus mains within band over any 1,2, and 5 percent-wide seems a to distin Two reasonable cutoff given period. percent cases more ar between the limited and flexible guish flexibility as even in the Rate Mechanism arrange rangements, Exchange ?2 XA bands were ment in Europe allowed. As with the mean are calculated over two absolute these probabilities deviation, and first otherwise Unless noted in the five-year rolling windows. we as use our primary windows the chronologies, five-year rolling measure in Section III of the paper. for the reasons discussed are especially to detect useful These rolling probabilities implicit unannounced pegs and bands. year and
B. De Jure Where
and de Facto
Pegs
and Bands
an the chronologies show the authorities explicitly a we scheme described shortcut the de facto peg, dating nouncing as the start of the peg. below and zero in on the date announced the mean absolute We then confirm (or not) the peg by examining over the announcement. The the period following monthly change we which the and year day, month, develop, give chronologies a peg becomes are essential to our algorithm. when operative, where we need to go beyond There are two circumstances simply our chronol the announced The first case is where peg. verifying ogies indicate that the peg applies only to an official rate and that is an active parallel As shown in (official or illegal) market. we same cases tests to the in of these the III, battery Figure apply we as to rate in a rate do the official market exchange parallel cases are where the official the unified market. there Second, an a In to of currencies. undisclosed basket these is peg policy cases, we verify if the "basket" peg is really a de facto peg to a single dominant (or to the SDR). If no dominant currency can be currency of course, identified, we do not label the episode as a peg. Potentially, there
43
we may be missing some de facto basket pegs, though in practice, issue. this is almost certainly not a major our approach We now describe toward detecting de facto no we a "de test If announced for there is pegs. peg, officially the monthly absolute facto" peg in two ways. First, we examine If the absolute monthly in the percent percent changes. change zero or rate to for four is consecutive months equal exchange as a is de that its classified however (for more, lasts) episode long facto peg if there are no dual or multiple rates. This exchange de facto pegs as well as those with allows us to identify short-lived a longer duration. For instance, this filter allowed us to identify in the Philippines' de facto peg to the US dollar during 1995-1997 the run-up to the Asian crisis as well as the numerous European de facto pegs to the DM well ahead of the introduction of the euro. the probability that the monthly Second, we compute exchange a 1 percent over a rolling rate change within remains band five-year period:34
P(?<
1%),
8 is the monthly where absolute in the ex percentage change or rate. If this is 80 percent then the change probability higher, as a de facto peg or crawling is classified peg over the regime If the exchange entire five-year rate has no drift, it is period. as a fixed parity; classified if a positive drift is present, it is a crawling labeled if the exchange rate also goes peg; and, of both and it is through periods appreciation depreciation, dubbed a "noncrawling" thresh peg. Our choice of an 80 percent old is not accidental, but rather we chose this value because it one would want to do a very good job at detecting appears regimes to label as pegs, without in a significant number of "false drawing
positives."
Our approach and de facto bands regarding preannounced as that of detecting follows the same process prean exactly nounced and de facto pegs, we simply replace the ? 1% band with a ?2% band in the algorithm. If a band is announced and the a we label the epi show unified chronologies market, exchange sode as a band unless as a de facto it had already been identified the criteria we also described earlier. peg by But, importantly, whether the announced and de facto bands verify espe coincide,
34. instances, are a handful There it is noted in the of cases chronologies. where a two-year window is used. In such
44
cases where the announced (de jure) cially as there are numerous band is much wider than the de facto band.35 To detect such cases, we calculate the probability that the monthly rate change exchange a ?2% band over a rolling five-year period: remains within P(?<2%). or higher, If this probability is 80 percent then the regime is as a de facto narrow horizontal, or noncrawl classified crawling, for both a sustained and (which allows ing band appreciation over it remains the period through which continu depreciation) above the 80 percent threshold. In the case where bands are wide the preannounced (mean or we to also than ?5%), greater verify ?5% bands. The ing equal in the country for each case are discussed chronologies. specifics as shown earlier in Table IV, in the case of Chile we For instance, was narrower 1992-1998 found that the de facto band during at the time (?10% and (?5%) than that which was announced In the case of Libya, which had an announced 77 per ?12.5%). cent wide band along &fixed central parity pegged to the SDR over a ?5% crawling the March 1986-December 2001, we detected ously band to the US Falling dollar.
C. Freely
almost in the text, there are situations, As we emphasize or hyperinflation, in which there due to high inflation invariably are mega-depreciations rate on a routine and in the exchange and is have that it basis. We sustained inappropriate argued clas is what all previous to lump these cases?which misleading or rate do?with sifications otherwise) (IMF regimes. We floating on two the criteria. of basis label episodes First, freely falling or ex rate of inflation the twelve-month equals periods where as freely falling unless are classified ceeds 40 percent they have as some form of preannounced identified been peg or prean nounced narrow band by the above criteria.36 The 40 percent
1994 crisis is one of rate policy prior to the December 35. Mexico's exchange numerous the fact that the band was widening of this pattern. Despite examples the peso over time, as the floor of the band was fixed and the ceiling was crawling, of time. to the US dollar for extended remained periods pegged virtually in criteria the high inflation 36. It is critical that the peg criteria supersede a majority of inflation stabilization since historically the classification strategy, of these rate as the nominal and in many anchor the exchange efforts have used our 40 percent above rates at the outset inflation of the peg were well episodes threshold.
45
as it has been iden is not entirely inflation threshold arbitrary, on the deter in the literature benchmark tified as an important minants of growth [2001]). As a special subcategory (see Easterly those episodes that meet of freely falling, we dub as hyperfloats or of (50 percent [1956] classic definition hyperinflation Cagan's more inflation per month). an exchange rate re where we classify situation A second a are as six months the immediately following freely falling gime a cases marks where the crisis for crisis?but those currency only a or to from a fixed or quasi-fixed transition regime managed are typically Such episodes floating independently regime.37 is another rate overshooting. This characterized by exchange a large change rate does not owe in the exchange situation where and of a loss of credibility to a deliberate policy; it is the reflection we To date these crisis attacks. episodes, recurring speculative and Rose of the approach follow a variant suggested by Frankel or the depreciation exceeds where [1996]. Namely, any month 12 V2 percent the preceding month's and also exceeds equals as a crisis.38 To is identified by at least 10 percent depreciation sure that this approach crisis dates, we make plausible yields the analysis with our extensive country chronologies, supplement of payments which also shed light on balance difficulties.39 Since, an explicit arrangement as a rule, freely falling is not typically of our chronologies also provide for all the freely falling choice, de jure or de facto arrangement (for exam cases, the underlying ple, dual markets, D. Managed Our independently Floating floating, etc.).
and Freely
toward and freely float identifying managed approach to create out is these classes of the residual ing episodes basically of our after of that, episodes comprehensive application pool as an explicit or implicit peg have not been identified algorithm, or some form of band, and that are not included in the freely
37. where rate. there was This rules out cases where rate swing occurred the large exchange a devaluation in the context and a repeg and cases of an already floating
and Rose of the crisis but 38. Frankel [1996] do not date the specific month over the year. the year; their criteria call for a 25 percent (or higher) depreciation crisis of July 1997 does not meet the modified 39. For the Thai instance, in Frankel-Rose criteria. While the depreciation exceeded that of the preced July more in that month than 10 the of the Thai Baht percent, by depreciation ing did not exceed 25 percent. For these of month cases, we rely on the chronologies events.
46
of exchange rate flexibility falling category. To proxy the degree a compos under freely floating and managed floats, we construct ite statistic, e/P(e where < 1%),
is the mean the numerator absolute monthly percent over a rate in the change exchange rolling five-year period, while of small changes. For de jure the denominator flags the likelihood or de facto pegs, this index will be very low (close to or equal to cases it will be very large. As for the freely falling zero), while on we this index for those countries and periods focus noted, only are candidates We which for freely or managed tabulate floating. of our index for the currencies that are the frequency distribution
most include US dollar/DM-euro, these transparently floating, US dollar/yen, US dollar/UK dollar, pound, US dollar/Australian on the date in which and US dollar/New Zealand dollar beginning We pool the observations the float was announced. (the ratio for for all the floaters. So, for example, averages) rolling five-year the real in January since Brazil floated calculate 1999, we would If Brazil's ratio falls inside the ratio only from that date forward. is freely interval the 99 percent confidence (the null hypothesis region is located at the lower tail floating and hence the rejection of the floater's the episode is charac of the distribution group), If that ratio falls in the lower 1 percent terized as freely floating. in favor of the of freely floating is rejected tail, the null hypothesis to note float. It is of alternative important managed hypothesis not does this definition that managed necessarily imply ac by refers market intervention?it tive or frequent foreign exchange reason our composite rate to the fact that for whatever exchange like the indices index, e/P(e < 1%), does not behave variability for the freely E. Dual Markets a hybrid arrangement. There are Dual rates are essentially or periods is nil and stable so that the in which the premium official rate is representative of the underlying monetary policy. or main rate could be pegged, The official exchange crawling, some bands, or in a few cases allowed to float. But tained within the between the divergence there are countless episodes where is incomplete rate is so large that the picture official and parallel rate is doing. The of what the parallel market without knowledge cases floaters. Exchange Rate Regimes and Parallel
or Multiple
EXCHANGE RATE ARRANGEMENTS 47 are critical In in identifying these episodes. country chronologies or parallel rates are present dual or multiple the cases where are active, we focus on the market-determined rates markets rates. As shown in Figure instead of the official exchange III, we or rate (dual, multiple, exchange subject the market-determined to the battery of tests described above.40 This particular parallel) reshape how we view the 1940s through category will especially about half the cases in the sample involved dual the 1960s, where
markets. University Harvard of Maryland, University College Park
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are a few such cases There in the rate. take place at the official
sample,
where
only
government
trans
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The Modern History of Exchange Rate Arrangements: A Reinterpretation Author(s): Carmen M. Reinhart and Kenneth S.

QUARTERLY JOURNAL OF ECONOMICS

THE MODERN HISTORY OF EXCHANGE RATE ARRANGEMENTS: A REINTERPRETATION*

going back classification

QUARTERLY JOURNAL OF ECONOMICS

QUARTERLY JOURNAL OF ECONOMICS

and Incidence Exchange

QUARTERLY JOURNAL OF ECONOMICS

1970-1973 Figure I Rate

Simplified IMF Classification

a history of the evolution of this paper, version

of the IMF's classification strategy, Reinhart and Rogoff [2002].

QUARTERLY JOURNAL OF ECONOMICS

and Market-Determined 1972

Indonesia: Log of Official

and Market-Determined 1972

Iran: Log of Official

the Changes Currency

in the Market Analysis,

EXCHANGE RATE ARRANGEMENTS TABLE I

QUARTERLY JOURNAL OF ECONOMICS TABLE II

The market-determined correlations correlations of the of the The market-determined

inflation 73.7 inflation 26.3

are higher are lower

EXCHANGE RATE ARRANGEMENTS

QUARTERLY JOURNAL OF ECONOMICS TABLE III

31.9 54.6 143.5 324.4

EXCHANGE RATE ARRANGEMENTS

QUARTERLY JOURNAL OF ECONOMICS

EXCHANGE RATE ARRANGEMENTS

Are There Dual Unified rate

From Chronologies: or Multiple Rates, or a Parallel

Market? or Dual/Multiple Parallel rates

From Chronologies: Is there an official announcement ?

Statistically classify regime using market determined exchange rates

If(12-month Infiation<40%) Classified as De Facto:

Freely floating Figure III Classification Algorithm

QUARTERLY JOURNAL OF ECONOMICS

EXCHANGE RATE ARRANGEMENTS

Canada (2): Log of Market-Determined Exchange Rate 1998 January 1946-December

Log of Market-Determined January 1946-December

Exchange Rate 1998

Freely Floating International Currency

QUARTERLY JOURNAL OF ECONOMICS

19 points, such the anchor

23. The IMF official

other Chronologies classification for

do not contain this in the the countries

but information, is posted sample

the annual at http:/1

Date September 16,1925-April 20,1932 Peg

Classification primary/secondary/tertiary in parentheses) (official IMF classification

July 30,1 Pound Ster standard US dollar b rates

June 29,1976-January February 1978-June

The Tablita The second

Parallel ma 1983. On was anno

Date December February 8,1984-January 1988-Januaiy

De facto crawling band around US dollar/Dual market (Managed floating)

PPP rule. Th band to US PPP rule. ?5

band to US the preann remain in

January 22, 1992-January

PPP rule. Ba ?10% cra below 15

January 20,1997-June June 25,1998-September September December September