1. Thorvaldur Gylfason Joint Vienna Institute/IMF Institute Course on Macroeconomic Management in Natural Resource-Rich Countries Vienna, 2-13 April 2012

2. 1.Real vs. nominal exchange rates 2.Exchange rate policy, welfare, and growth 3.Dutch disease, overvaluation, and volatility 4.Exchange rate regimes To float or not to float To float or not to float How many currencies? How many currencies?

3. 1 Q = real exchange rate e = nominal exchange rate P = price level at home P* = price level abroad Increase in Q means real appreciation e e refers to foreign currency content of domestic currency

4. Q = real exchange rate e = nominal exchange rate P = price level at home P* = price level abroad Devaluation or depreciation of e makes Q also depreciate unless P rises so as to leave Q unchanged

5. 1.e falls 1. Suppose e falls Then more rubles per dollar, X risesZ falls so X rises, Z falls 2.P falls 2. Suppose P falls X risesZ falls Then X rises, Z falls 3.P* rises 3. Suppose P* rises X risesZ falls Then X rises, Z falls Q falls Capture all three by supposing Q falls X risesZ falls Then X rises, Z falls

6. Remember: fiscal and monetary restraint Devaluation needs to be accompanied by fiscal and monetary restraint to prevent prices from rising and thus eating up the benefits of devaluation real To work, nominal devaluation must result in real devaluation

7. Foreign exchange Real exchange rate Imports Exports 2 Earnings from exports of goods, services, and capital Payments for imports of goods, services, and capital Equilibrium

8. Equilibrium between demand and supply in foreign exchange market establishes Equilibrium real exchange rate Equilibrium in balance of payments BOP = X + F x – Z – F z = X – Z + F = X – Z + F = current account + capital account = 0 X – Z = current account F = capital and financial account X – Z = current account F = capital and financial account

9. Foreign exchange Real exchange rate Imports Exports Overvaluation Deficit R R moves when e is fixed

10. Foreign exchange Price of foreign exchange Supply (exports) Demand (imports) Overvaluation Deficit Overvaluation works like a price ceiling

11. Supply Demand E Producersurplus Consumersurplus Quantity Price A B C welfare gain Total welfare gain associated with market equilibrium equals producer surplus (= ABE) plus consumer surplus (= BCE) welfare gain Total welfare gain associated with market equilibrium equals producer surplus (= ABE) plus consumer surplus (= BCE)  R = 0, so R is fixed when e floats

12. Supply Demand Price ceiling E F G Quantity Price Welfareloss Price ceiling imposes a welfare loss welfare loss equivalent to the triangle EFG Price ceiling imposes a welfare loss welfare loss equivalent to the triangle EFG A B C Consumer surplus = AFGH H J Producer surplus = CGH Total surplus = AFGC

13. Supply Demand Price ceiling E F G Quantity Price Welfareloss Price ceiling imposes a welfare loss welfare loss that results from shortage (e.g., deficit) Price ceiling imposes a welfare loss welfare loss that results from shortage (e.g., deficit) A B C H J Shortage Welfare triangles Harberger triangles Welfare triangles Harberger triangles K

14.  Appreciation of currency in real terms, either through inflation or nominal appreciation, leads to a loss of export competitiveness  In 1960s, Netherlands discovered natural resources (gas deposits)  Currency (Dutch guilder) appreciated  Exports of manufactures and services suffered, but not for long  Not unlike natural resource discoveries, aid inflows could trigger the Dutch disease in receiving countries 3 See my “Dutch Disease” in New Palgrave Dictionary of Economics OnlineDutch Disease See my “Dutch Disease” in New Palgrave Dictionary of Economics OnlineDutch Disease

15.  Review basic theory of Dutch disease in simple demand and supply model  Analytical literature uses complex two- or three sector models  Tradable manufactures  Tradable resources  Nontradable services

16. Foreign exchange Real exchange rate Imports Exports without oil Exports with oil A CB Oil discovery leads to appreciation, and reduces nonoil exports Composition of exports matters

17. Foreign exchange Real exchange rate Imports Exports without oil Exports with oil A CB Imports with immigration D Immigrations means more income and imports as well as remittances abroad

18.  Spending effect  Increased income from booming natural resource sector boosts private and public spending, raising prices and output in non-tradables sector  In non-natural resource tradables sector (“manufacturing”), prices are fixed at world levels, profits are squeezed by rising wages, and increased demand is met out of rising imports  Resource movement effect  Natural resource boom attracts capital and labor away from rest of economy  Output declines in non-resource economy, esp. in tradables, where prices are fixed at world levels

19.  Both effects result in  Decrease in output share of non-natural resource tradables relative to non-tradables  Appreciation of real exchange rate  So, decline of manufacturing and appreciation of currencies in real terms tend to go hand in hand  Extensive theoretical literature behind this result  What do the data say?  Recent literature survey by Magud and Sosa (2010) “When and Why Worry About Real Exchange Rate Appreciation? The Missing Link between Dutch Disease and Growth,” WP/10/271

20. Dutch disease shocks Natural resources/capital inflows Source: Magud and Sosa (2011) Number of cases reported

21. RemittancesForeign aid Number of cases reported Source: Magud and Sosa (2011)

22. Empirical studiesTheoretical studies Number of cases reported Source: Magud and Sosa (2011)

23. Currency misalignmentsExchange rate changes Number of cases reported Source: Magud and Sosa (2011) Does overvaluation reduce growth? Does undervaluation?

24.  Dutch disease does exist  Resource booms make currencies appreciate  When currency appreciates in real terms, factors of production are reallocated and production switches away from manufacturing Exchange rate volatility hampers economic growth (not shown here, will see later)  Misalignment of real exchange rate from its fundamental value also lowers growth Overvaluation is always bad for growth Evidence on the effect of undervaluation on growth is inconclusive

25.  Foreign exchange earnings are converted into local currency and used to buy domestic goods  Fixed  Fixed exchange rate regime real  Reserve inflow causes expansion of money supply that leads to inflation and appreciation of domestic currency in real terms  Flexible  Flexible exchange rate regime nominal real  Increase in supply of foreign exchange leads to nominal appreciation of currency, so real exchange rate also appreciates M = D + R Q = eP/P* M = Money D = Domestic credit R = Reserves M = Money D = Domestic credit R = Reserves

26. Foreign exchange Real exchange rate Imports aid Exports without aid aid Exports with aid A CB Foreign aid leads to appreciation, and reduces exports (e.g., Zambia) Trade vs. aid

27.  Foreign aid has sometimes been compared to natural resource discoveries  Aid and growth are inversely related across countries  Cause or effect?  156 countries, 1960-2000 r = -0.36 r = rank correlation Other people’s money Importance of good governance Leakages

28. Foreign exchange Real exchange rate Imports inflow Exports without inflow inflow Exports with inflow A CB Capital account liberalization leads to appreciation, and sometimes instability when inflow stops or reverses itself Crises

29.  Term refers to fears of de-industrialization that gripped the Netherlands following the appreciation of Dutch guilder after the discovery of natural gas deposits in North Sea around 1960  Is it Dutch? Is it a disease? No  Some say No, viewing it simply as matter of one sector’s benefiting at the expense of others, without seeing any macroeconomic or social damage done Yes  Others say Yes, viewing the Dutch disease as an ailment, pointing to the potentially harmful consequences of the resulting reallocation of resources – from high-tech, high-skill intensive service industries to low-tech, low-skill intensive primary production, for example – for economic growth and diversification Double misnomer?

31.  Overvaluation of currency hurts other exports and import-competing industries  Norway’s total exports were long stagnant in proportion to GDP following oil discoveries  Oil exports crowded out nonoil exports Nokia is Finnish, LM Ericsson is Swedish, B&O is Danish  Norway’s almost unique unwillingness to join EU  Composition of exports matters  High-skill vs. low-skill intensive exports have different spillover effects on other industries  High exchange rate hurts efficiency and growth  Just as China’s undervalued renmimbi boosts growth Africa

32.  Rent seeking …  Especially in conjunction with ill-defined property rights, imperfect or missing markets, and lax legal structures  … tends to divert resources away from more socially fruitful economic activity  “Other people’s money”  Social strife and conflict (e.g., “diamond wars”)  False sense of security  Risk of rusting foundations of growth  Education (Human capital)  Investment (Physical capital)  Institutions (Social capital)

33.  Volatility of commodity prices leads to volatility in exchange rates, export earnings, output, and employment  Volatility can be detrimental to investment and growth  Hence, natural-resource rich countries may be prone to sluggish investment and slow growth due to export price volatility  Likewise, high and volatile exchange rates tend to slow down investment and growth

34. Uneven income streamEven income stream

35. Source: http://notendur.hi.is/gylfason/pic22.htm

36. Output volatility and economic growth 1960-2000  Inverse cross-country correlation between per capita growth and GDP volatility  GDP volatility is defined as the standard deviation of per capita growth  163 countries, 1960-2000 r = -0.47

37.  Large inflows of foreign exchange earnings from a natural resource discovery can trigger a bout of Dutch disease  Real appreciation hurts competitiveness of exports and can thus undermine economic growth  Exports have played a pivotal role in the economic development of many countries  An accumulation of “know-how” often takes place in the manufacturing export sector, which may confer positive external benefits on the rest of the economy

38. if  Resource boom is likely to lead to Dutch disease if  It leads to high demand for nontradables Trade restrictions may produce this outcome Recipient country uses aid to buy nontradables (including social services) rather than imports  Production is at full capacity Production of nontradables cannot be increased without raising wages in that sector  Resource rent is not used to build up infrastructure and relax supply constraints Including free mobility of labor across countries  Price and wage increases in nontradables sector lead to strong wage pressure in tradables sector

39.  The risk that resource boom might have adverse impact on economy due to, e.g., oil-induced Dutch disease crucially depends on how resource rent is used in recipient countries four how the rent is spent  We can identify four different cases based on how the rent is spent, and in which the macroeconomic implications of rent flows differ foreign aid Argument also applies to inflows of foreign aid

40.  Spending can take several forms, with different macroeconomic implications:  Case 1saved  Case 1: Rent is saved by government  Case 2used to purchase imported goods  Case 2: Rent is used to purchase imported goods that would not have been purchased otherwise  Case 3used to buy nontradables with infinitely elastic supply  Case 3: Rent is used to buy nontradables with infinitely elastic supply  Case 4used to buy nontradables for which there are supply constraints  Case 4: Rent is used to buy nontradables for which there are supply constraints

41.  Rent is saved by government  Rent inflow leads to accumulation of foreign exchange reserves in Central Bank not allowed to enter the spending stream … and, unlike increased rent that is spent, is not allowed to enter the spending stream  No effect on money supply  No inflation  No appreciation of currency I.e., no increase in exchange rate  No risk of Dutch disease

42.  Rent is used to purchase imported goods that would not have been purchased otherwise  Import purchases lead to transfer of real resources from abroad, but not to increased spending at home  No effect on money supply  No inflation  No appreciation of currency  No risk of Dutch disease

43.  Rent is used to buy domestic nontradables with infinitely elastic supply due to underutilized resources (labor and capital) in economy  Increased demand for nontradables  Because some factors are unemployed, greater demand leads to increased supply  This has a positive impact on production without increasing nontradables prices  No risk of Dutch disease

44.  Rent is used to buy nontradables for which there are supply constraints, with all available resources already in use (e.g., social services)  Increased demand for nontradables  Increased prices for nontradables  Shift of inputs away from tradables (exports and import-competing goods and services) into nontradables  Real appreciation of the currency  Dutch disease!

45.  Monetary policy response determines if real appreciation of currency will take place through inflation or nominal appreciation  If foreign currency is used to increase Central Bank reserves, increased spending on nontradables increases money supply and inflation, so currency appreciates in real terms  If Central Bank sterilizes impact on money supply of increased spending on nontradables by selling foreign exchange, currency appreciates in nominal, and real, terms So, in either case, currency appreciates in real terms

46.  To recapitulate, the risk of Dutch disease varies, and depends on CASE 1  How rent is used (saved or spent) – CASE 1 CASE 2  The presence of a rent absorption constraint – CASE 2 CASE 3  The impact of rent on productivity in the nontradables sector – CASE 3 CASE 4  The existence of externalities in nontradables sector affecting the rest of the economy – CASE 4

47.  Rent inflow can give rise to Dutch disease when government uses the rent to purchase nontradables rather than imported goods and when there are constraints on increasing production in nontradables sector  The risk of Dutch disease is greater when rent is used in social sectors facing constraints on increasing their production due to resource scarcity (rent absorption constraint)

48.  How can resource-rich countries avoid translating rent into Dutch disease?  Save the rent  Save the rent and increase central bank reserves (gross, not net) by not allowing the rent inflow to enter spending stream Hartwick rule Recall the Hartwick rule purchase imported goods  Use rent to purchase imported goods  Boost rent absorption capacity  Boost rent absorption capacity in nontradables sector

49.  Policymakers in resource-rich countries need to pay attention to potential early warning signals of, say, oil-induced Dutch disease such as  Tendency for wages and prices in nontradables sector to increase  Decline in profitability and sales of export and import-competing industries  Rapid relative rise of per capita GDP in dollars Recall: Argument applies to sudden inflows of foreign capital as well as natural resource booms

50.  Once more, macroeconomic impact of resource rents depends critically on policy response to rents  Interaction between fiscal policy and monetary policy is crucial  To highlight this interaction, apply two related but distinct concepts  Absorption  Absorption: Monetary policy  Spending  Spending: Fiscal policy

51.  Absorption (= expenditure) non-oil current account deficit widens with increased rent  Extent to which non-oil current account deficit widens with increased rent Captures amount of net imports financed by increase in rents  Given fiscal policy, absorption is controlled by Central Bank’s decision about how much of rent-induced foreign exchange to sell in markets If Central Bank uses full increment of rent- induced foreign exchange to bolster reserves, rent will not be absorbed

52.  Spending non-oil fiscal deficit widens with increased rent  Extent to which non-oil fiscal deficit widens with increased rent Captures extent to which government uses rent to finance increased expenditures  Given monetary policy, spending is controlled by government’s decision about how much of the rent to spend, on either imports or non-traded goods If government decides to save full increment in rent, rent will not enter spending stream

53.  Different combinations of absorption and spending define policy response to a surge in rent inflows equivalent  Absorption and spending are equivalent if rent is stored abroad or spent on imports differ  Absorption and spending differ when government provides rent-related foreign exchange to Central Bank and chooses how much to spend on domestic goods while Central Bank decides how much of the rent- related foreign exchange to sell in markets

54. always floats  The real exchange rate always floats  Through nominal exchange rate adjustment or price change  Even so, it matters how countries set their nominal exchange rates because floating takes time  There is a wide spectrum of options, from absolutely fixed to completely flexible exchange rates 4

55.  There is a range of options Monetary union or dollarization Means giving up your national currency or sharing it with others (e.g., EMU, CFA, EAC) Currency board Legal commitment to exchange domestic for foreign currency at a fixed rate Fixed exchange rate (peg) Crawling peg Managed floating Pure floating

56.  Currency union or dollarization  Currency board  Peg Fixed Horizontal bands  Crawling peg Without bands With bands  Floating Managed Managed Independent FIXED FLEXIBLE

57. Dollarization  Use another country’s currency as sole legal tender Currency union  Share same currency with other union members Currency board  Legally commit to exchange domestic currency for specified foreign currency at fixed rate Conventional (fixed) peg  Single currency peg  Currency basket peg

58. Flexible peg  Fixed but readily adjusted Crawling peg  Complete  Compensate for past inflation  Allow for future inflation  Partial  Aimed at reducing inflation, but real appreciation results because of the lagged adjustment Fixed but adjustable

59. Managed floating  Management by sterilized intervention I.e., by buying and selling foreign exchange  Management by interest rate policy, i.e., monetary policy E.g., by using high interest rates to attract capital inflows and thus lift the exchange rate of the currency Pure floating

60. Governments may try to keep the national currency overvalued To keep foreign exchange cheap To have power to ration scarce foreign exchange To make GDP look larger than it is Other examples of price ceilings Negative real interest rates Rent controls in cities

61. Inflation can result in an overvaluation of the national currency Q = eP/P* Remember: Q = eP/P* eP Suppose e adjusts to P with a lag Q Then Q is directly proportional to inflation Numerical example

62. Time Real exchange rate 100 110 105 Average Suppose inflation is 10% per year

63. Time 100 120 Real exchange rate 110Average real Hence, increased inflation lifts the real exchange rate as long as the nominal exchange rate adjusts with a lag Suppose inflation rises to 20%

64. floating Under floating e Depreciation is automatic: e moves But depreciation may take time fixed exchange rate regime Under a fixed exchange rate regime Q Devaluation will lower e and thereby also Q – provided inflation is kept under control Does devaluation improve the current account? The Marshall-Lerner condition

65. e B = eX – Z in foreign currency = eX(e) – Z(e) eB elowerseXX Not clear that a lower e helps B because decrease in e lowers eX if X stays put Let’s do the arithmetic Bottom line is: Devaluation strengthens current account as long as Suppose prices are fixed, so e = Q a a = elasticity of exports b b = elasticity of imports a a = elasticity of exports b b = elasticity of imports Valuation effect Valuation effect arises from the ability to affect foreign prices eX Lower e raises X eZ Lower e reduces Z eX Lower e raises X eZ Lower e reduces Z

66. 11 -+ Export elasticity Import elasticity Import elasticity -ab eX Lower e raises X eZ Lower e reduces Z eX Lower e raises X eZ Lower e reduces Z

67. if X Assume X = Z/e initially Appreciation weakens the current account -ab

68. Econometric studies indicate that the Marshall-Lerner condition is almost invariably satisfied Industrial countries: a = 1, b = 1 Developing countries: a = 1, b = 1.5 Hence, Devaluation strengthens the current account

69. Elasticity ofElasticity of exportsimports Argentina0.60.9 Brazil0.41.7 India0.52.2 Kenya1.00.8 Korea2.50.8 Morocco0.71.0 Pakistan1.80.8 Philippines0.92.7 Turkey1.42.7 Average1.11.5

70. price takers Small countries are price takers abroad Devaluation has no effect on the foreign currency price of exports and imports not So, the valuation effect does not arise Devaluation will, at worst, if exports and imports are insensitive to exchange rates (a = b = 0), leave the current account unchanged Hence, if a > 0 or b > 0, devaluation strengthens the current account

71. For an emerging country with … Initial trade balance Initial trade balance Export-to-GDP ratio of 40% Export-to-GDP ratio of 40% … nominal depreciation by 10% permanently improves trade balance by 1½% to 2% of GDP in medium term Effect depends on class of exporter Effect depends on class of exporter Oil, non-oil, manufactures Most of the effect is through imports and is felt within 3 to 5 years

72.  If overvaluation of currency hurts exports, undervaluation must by similar logic help exports  Yet, as we saw, empirical evidence is mixed  Some countries – e.g., China – have kept their currencies undervalued to boost exports and contain imports  Undervaluation as export promotion policy  Undervaluation leads to buildup of foreign exchange reserves  Reserve buildup raises some of the same issues as natural resources booms

73.  In view of the success of the EU and the euro, economic and monetary unions appeal to many other countries with increasing force  Consider four categories  Existing monetary unions  De facto monetary unions  Planned monetary unions  Previous – failed! – monetary unions

74.  CFA franc  14 African countries  CFP franc  3 Pacific island states  East Caribbean dollar  8 Caribbean island states Picture of Sir W. Arthur Lewis, the great Nobel-prize winning development economist, adorns the $100 note  Euro, more recent  16 EU countries plus 6 or 7 others Thus far, clearly, a major success in view of old conflicts among European nation states, cultural variety, many different languages, etc.

75.  Australian dollar  Australia plus 3 Pacific island states  Indian rupee  India plus Bhutan (plus Nepal)  New Zealand dollar  New Zealand plus 4 Pacific island states  South African rand  South Africa plus Lesotho, Namibia, Swaziland – and now Zimbabwe  Swiss franc  Switzerland plus Liechtenstein  US dollar  US plus Ecuador, El Salvador, Panama, and 6 others

76.  East African shilling (2009)  Burundi, Kenya, Rwanda, Tanzania, and Uganda  Eco (2009)  Gambia, Ghana, Guinea, Nigeria, and Sierra Leone (plus, perhaps, Liberia)  Khaleeji (2010)  Bahrain, Kuwait, Qatar, Saudi-Arabia, and United Arab Emirates  Other, more distant plans  Caribbean, Southern Africa, South Asia, South America, Eastern and Southern Africa, Africa

77.  Danish krone 1886-1939  Denmark and Iceland 1886-1939: 1 IKR = 1 DKR  2009: 2,500 IKR = 1 DKR (due to inflation in Iceland)  Scandinavian monetary union 1873-1914  Denmark, Norway, and Sweden  East African shilling 1921-69  Kenya, Tanzania, Uganda, and 3 others  Mauritius rupee  Mauritius and Seychelles 1870-1914  Southern African rand  South Africa and Botswana 1966-76  Many others No significant divergence of prices or currency rates following separation 99.95%

78.  Centripetaljoin  Centripetal tendency to join monetary unions, thus reducing number of currencies stable exchange rates  To benefit from stable exchange rates at the expense of monetary independence  Centrifugalleave  Centrifugal tendency to leave monetary unions, thus increasing number of currencies monetary independence  To benefit from monetary independence often, but not always, at the expense of exchange rate stability  With globalization, centripetal tendencies appear stronger than centrifugal ones

79. FREE CAPITAL MOVEMENTS FREE CAPITAL MOVEMENTS FIXED EXCHANGE RATE FIXED EXCHANGE RATE MONETARY INDEPENDENCE MONETARY INDEPENDENCE Monetary Union (EU) Monetary Free to choose only two of three options; must sacrifice one of the three

80. FREE CAPITAL MOVEMENTS FREE CAPITAL MOVEMENTS FIXED EXCHANGE RATE FIXED EXCHANGE RATE MONETARY INDEPENDENCE MONETARY INDEPENDENCE Capital controls (China) Free to choose only two of three options; must sacrifice one of the three

81. FREE CAPITAL MOVEMENTS FREE CAPITAL MOVEMENTS FIXED EXCHANGE RATE FIXED EXCHANGE RATE MONETARY INDEPENDENCE MONETARY INDEPENDENCE Flexibleexchange rate (US, UK, Japan) Flexibleexchange Free to choose only two of three options; must sacrifice one of the three

82. FREE CAPITAL MOVEMENTS FREE CAPITAL MOVEMENTS FIXED EXCHANGE RATE FIXED EXCHANGE RATE MONETARY INDEPENDENCE MONETARY INDEPENDENCE Monetary Union (EU) Monetary Flexibleexchange rate (US, UK, Japan) Flexibleexchange Capital controls (China) Free to choose only two of three options; must sacrifice one of the three

83. free trade four freedoms  If capital controls are ruled out in view of the proven benefits of free trade in goods, services, labor, and also capital (four freedoms), … monetary independence flexible exchange rates) vs. fixed rates  … then long-run choice boils down to one between monetary independence (i.e., flexible exchange rates) vs. fixed rates  Cannot have both!  Either type of regime has advantages as well as disadvantages  Let’s quickly review main benefits and costs

84. BenefitsCosts Fixed exchange rates Floating exchange rates

85. BenefitsCosts Fixed exchange rates Stability of trade and investment Low inflation Floating exchange rates

86. BenefitsCosts Fixed exchange rates Stability of trade and investment Low inflation Inefficiency BOP deficits Sacrifice of monetary independence Floating exchange rates

87. BenefitsCosts Fixed exchange rates Stability of trade and investment Low inflation Inefficiency BOP deficits Sacrifice of monetary independence Floating exchange rates Efficiency BOP equilibrium

88. BenefitsCosts Fixed exchange rates Stability of trade and investment Low inflation Inefficiency BOP deficits Sacrifice of monetary independence Floating exchange rates Efficiency BOP equilibrium Instability of trade and investment Inflation

89.  In view of benefits and costs, no single exchange rate regime is right for all countries at all times  The regime of choice depends on time and circumstance inefficiency  If inefficiency and slow growth due to currency overvaluation are the main problem, floating rates can help inflation  If high inflation is the main problem, fixed exchange rates can help, at the risk of renewed overvaluation  Ones both problems are under control, time may be ripe for monetary union What do countries do? To eliminate high inflation, need fixed exchange rate for a time

90.  There is no evidence that countries with abundant natural resources are more prone to inflation than other countries  They tend to grow more slowly, yes, but their inflation record is indistinguishable from others  Therefore, as far as inflation is concerned, choice between fixed and floating rates is essentially the same in natural-resource rich countries and elsewhere  Volatility of export earnings in natural-resource rich countries calls for flexibility – if not in exchange rate, then, e.g., in migration

91. Source: Annual Report on Exchange Arrangements and Exchange Restrictions database. What countries actually do (Number of countries, April 2008) (3) (12) (22) (5)(2)(66) (44)(40) (76) (84) (10)

92. No national currency 6% Currency board 7% Conventional fixed rates 36% Intermediate pegs 5% Managed floating 24% Pure floating 22% 100% 46% 54% increased interest in fixed rates There is a gradual tendency towards floating, from 10% of LDCs in 1975 to almost 50% today, followed by increased interest in fixed rates through economic and monetary unions The End These slides will be posted on my website: www.hi.is/~gylfason