Exhange rate policy and growth: remarks from the Argentine perspective Hernán Lacunza Head of Research Central Bank of Argentina

Outline Technical Suggestions Remarks from Argentina

Technical Suggestions 1.Reserves as proxy of FOF in reverse: possible bias in regression analysis (dummies?, systematic accumulation?) 2.Net Positive Intervention (Bofinger and Wollmershäuser, 2002) 3.Exchange rate and exports: direct test and lags effects. Inflationary performance. Capital mobility. Financial dollarization Credibility / commitment -+ Monetary autonomy Real volatility Floats Pegs Bipolar view Vanishing middle? FIT “Developed” floats Exchange rate regime choice: from the conventional to the bipolar view, and beyond... Exchange rate regime choice: from the conventional to the bipolar view, and beyond... Type of Shock Exchange rate regime Nominal Peg Real Float. Inflationary performance. Capital mobility. Financial dollarization Credibility / commitment -+ Monetary autonomy Real volatility Floats Pegs Bipolar view Vanishing middle? FIT “Developed” floats Type of Shock Exchange rate regime Nominal Peg Real Float

Possible Bias in the Regression Analysis. Inflationary performance. Capital mobility. Financial dollarization Credibility / commitment -+ Monetary autonomy Real volatility Floats Pegs Bipolar view Vanishing middle? FIT “Developed” floats Exchange rate regime choice: from the conventional to the bipolar view, and beyond... Exchange rate regime choice: from the conventional to the bipolar view, and beyond... Type of Shock Exchange rate regime Nominal Peg Real Float. Inflationary performance. Capital mobility. Financial dollarization Credibility / commitment -+ Monetary autonomy Real volatility Floats Pegs Bipolar view Vanishing middle? FIT “Developed” floats Argentina `90s, Brasil 2006

Systematic Reserves Accumulation. Inflationary performance. Capital mobility. Financial dollarization Credibility / commitment -+ Monetary autonomy Real volatility Floats Pegs Bipolar view Vanishing middle? FIT “Developed” floats Exchange rate regime choice: from the conventional to the bipolar view, and beyond... Exchange rate regime choice: from the conventional to the bipolar view, and beyond... Type of Shock Exchange rate regime Nominal Peg Real Float. Inflationary performance. Capital mobility. Financial dollarization Credibility / commitment -+ Monetary autonomy Real volatility Floats Pegs Bipolar view Vanishing middle? FIT “Developed” floats Type of Shock Exchange rate regime Nominal Peg Real Float

Net Positive Intervention Bofinger and Wollmershäuser (2002)Levi-Yeyati and Sturzenegger (2007) (1)(2) (3)(4) (3/1)(4/2) (2) (3)

Exchange Rates and Exports Indirect test: (1)RER t – RER t-1 = b * Intervention + other variables + є (2)Exports = c * Intervention + other variables + є Direct test: (3) Exports = a * RER + other variables + є Lags: short and long run

Remarks from the Argentine perspective International Reserves in US Dollars

Reserves accumulation and FX policy 1. Insurance policy 2. Counter-cyclical policy 3. Real exchange rate policy Crisis avoidance Macroeconomic consistence Transitory trend? Fear of floating in reverse, or one step before? FX policy and growth: evidence in search of a theory?

Insurance policy

Counter-cyclical policy: sources of reserves

Macroeconomic consistence and political economy “Purchasing power illusion”: middle class benefits  high support “Political trap”: elected administrations do not propose changes, regime “explodes” too late Argentina: per capita GDP in constant USD (2001) 1980: USD 15,900 pc 1998: USD 9,000 pc 1973: USD 5,000 pc 1989, 2002: USD 2,600 pc

A transitory trend?

Real exchange rate volatility

FX policy and growth Washington Consensus Johnson, Ostry and Subramanian (2006): overvalued exchange rates are associated with lower growth Rajan and Subramanian (2006): share of manufacturing exports Prasad, Rajan and Subramanian: foreign finance doesn’t boost growth (underdeveloped financial system) East-Asian experience: Subramanian’s yesterday chart: East-Asia 17% average undervaluation; Africa 18% average overvaluation

Evidence in search of a theory? Is Diaz Alejandro’s hypothesis opposed to new evidence? Not really: DA’s views applied to the short run: contractionary effects of sharp devaluations, provoked by income redistributions to sectors with lower spending propensity (see Bebczuk and Galindo, 2006) That’s higher propensity of saving, consistent with Levy Yeyati’s hypothesis Contraction in the short-run (lower spending), expansion in the long-run (through higher investment)

Concluding remarks Reserves accumulation: self-insurance policy, counter- cyclical policy; crisis avoidance; macroeconomic consistency Transitory or permanent trends? Under uncertainty, it is prudent to manage any euphoria Argentina: in transition to the steady-state Evidence in search of theory or an “old theory” that still holds? Too early to speak of new “regimes”. It may be a temporary, useful policy; the key point is to balance costs and benefits appropriately