1 Eduardo Levy Yeyati The World Bank & Universidad Torcuato Di Tella Federico Sturzenegger Kennedy School, Harvard Univ. & Universidad Torcuato Di Tella May, 2007 Fear of Floating in Reverse: Exchange Rate Policy in the 2000s

Storyboard  LYS updated: Regimes in the 2000s  Fear of floating or fear of appreciation?  Fear of floating in reverse: reviving exchange rate policy  Economic impact  Final remarks: Brainstorming

Key criterion: ER variability relative to forex intervention The intervention dimension is key to characterized exchange rate policy (as opposed to the evolution of exchange rates) and its consequences Exchange rate regimes in the 2000s: Classification Classification

Regime in the 2000s: Nothing changed? Source: LYS (2006)

Fear of floating’s underlying fears: –Contractionary devaluations (due to BS effects) and currency and debt crisis propensity –Dollar pricing, pass-through & inflation Fear of flying: Leaning against the appreciation wind –Intervention to strenthen the demand for the foreign currency, to avoid/mitigate appreciation pressures Not to be mistaken with fear of sudden stops in the aftermath of a crisis Fear of flying: A characterization

Fear of floating? (non-floats) Source: LYS (2006)

The comeback of exchange rate policy?  Mercantilist interventions as a substitute for protection  Less specific than subsidies  Less prone to mismanagement & corruption  Fear of floating in reverse (FoFiR)  Invertion of the ER anchor problem: sustaining an undervalued currency  Instead of amplified recessions due to price rigidities…  …inflationary expansions fueled by positive real shocks.  Does it work? How?

FoFiR: leaning against the appreciation wind Additional controls: country and time FE, terms of trade, GDP of trade partners, net inflows.

…at the cost of inflation pressures Additional controls: country and time FE, dlog(M2), dlog(GDP), dl(RER), lagged dep. var.

Intervention & growth Additional controls: country and time FE, terms of trade, GDP of trade partners, net inflows, dlog(pop), lagged HP cycle, lagged GDP, lagged dep. var.

Intervention & long-term growth? Additional controls: country and time FE, terms of trade, GDP of trade partners, net inflows, dlog(pop), lagged HP cycle, lagged GDP, lagged dep. var.

Savings & investment Additional controls: country and time FE, terms of trade, GDP of trade partners, net inflows, dlog(pop), lagged dlog(GDP), savings

High dollar, low wages? Additional controls: country and time FE, terms of trade, GDP of trade partners, net inflows, lagged dlog(product), dlog(pop)

Example

Example

Example

Example

Example

Example

Taking stock  Distribution of regimes little changed in the 00s  But the composition of non-floats have changed  Reversed fear of floating is an increasingly popular contender  Positive on  Long-run & productivity growth  Saving & investment  Not so much on exports  Is it merely low real wages?

Thank you

22 Eduardo Levy Yeyati The World Bank & Universidad Torcuato Di Tella Federico Sturzenegger Kennedy School, Harvard Univ. & Universidad Torcuato Di Tella May, 2007 Fear of Floating in Reverse: Exchange Rate Policy in the 2000s

Exchange rate volatility (  e ): average of the absolute value of monthly changes in the exchange rate Volatility of exchange rate changes (   e ): standard deviation of monthly changes in the exchange rate Volatility of reserves (  R ): average of the absolute value of monthly changes in international reserves relative to the monetary base of the previous month (both denominated in US dollars) De facto regimes over the years: Classification

De facto regimes over the years: Classification De facto regimes over the years: Classification