Summary
Identifying the exchange rate regime in force is not always easy, especially when a country claims to have a floating exchange rate but is in fact managing that rate quite heavily. The issue then is whether the intervention is such that in practice the regime is closer to being a peg to some currency or basket of currencies than to a genuine float. Recognition that countries often misstate their regime has given rise to various attempts to use statistical analysis (termed “de facto” methods) to identify the regime. For example, a peg might be defined by either (a) a low average degree of monthly exchange rate movement, (b) no more than a small number of monthly movements above some threshold level, or (c) a low range of variation of the level of the exchange rate over the period. All of these methods have been used. These efforts have been disappointing in the sense that there has been a high level of disagreement between the results of different methods.
In this Nottingham School of Economics working paper, Bleaney and his co-authors show that the fact that the methods use slightly different statistical approaches (as stated above) is not the major source of disagreement. Disagreements mainly arise from different choices of threshold between a peg and a float, or in how parity changes are dealt with. It is demonstrated that, if the schemes are modified to be more consistent with one another in these aspects, then there is a far higher agreement rate between the modified classifications. Hence the conclusion that the current pessimism about de facto exchange rate regime classification schemes is unwarranted.
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School Discussion Paper 2015-01, Michael Bleaney, Mo Tian and Lin Yin analyse why existing classification schemes disagree so much, and suggest improvements that would lead to a much higher degree of agreement, February 2015
Authors
Michael Bleaney, Mo Tian and Lin Yin
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Posted on Sunday 1st February 2015