IDEAS home Printed from https://ideas.repec.org/a/eso/journl/v34y2003i3p211-228.html
   My bibliography  Save this article

The Art of Gracefully Exiting a Peg

Author

Listed:
  • Ahmet Asici

    (Graduate Institute of International Studies)

  • Charles Wyplosz

    (Graduate Institute of International Studies and CEPR)

Abstract

The wave of liberalization of capital movements, which swept Europe in the 1980s and the emerging market countries in the 1990s, has given rise to the two-corner strategy. According to this view only two exchange rate regimes are sustainable: hard pegs and fully flexible rates. Soft pegs in the middle are seen as doomed, open to irresistible and unpredictable speculative attacks and historical evidence shows clearly that increasing number of countries have exited the soft middle ground, mostly towards the flexible end of the spectrum. However, not all the exits from hard pegs to flexible arrangements are happy. Most countries hesitate to leave the peg when it is working properly, and consider exit option only when they are facing speculative pressure, and then it often is too late. This paper aims to analyze the factors contributing to peaceful exits, that is exiting without a significant loss in the value of the domestic currency. It seeks to find conditions that need to be satisfied to ensure an exit without significant economic costs. Historical record of exchange rate classification comes from Reinhart and Rogoff's path-breaking study on this subject, where they classified regimes on the basis of observed, de facto, currency movements rather than the announced, de jure, official rates. Some interesting results we have found may be put as follows: Cold-blooded exits enacted when the macroeconomic conditions are favorable, that is countries planning to leave a peg are advised to do it when it is least necessary and least expected. Another surprising result is that, efficient and deep financial markets do not help with exits. Countries encouraged to exit pegs before they fully liberalize their financial account and deepen their markets. The study covers the period 1975-2001. Our choice criteria provide 55 cases of exits, 27 of which is peaceful and the rest 28 cases troubled ones. We estimate non-structural probit models with monthly and annual data.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Ahmet Asici & Charles Wyplosz, 2003. "The Art of Gracefully Exiting a Peg," The Economic and Social Review, Economic and Social Studies, vol. 34(3), pages 211-228.
    • Handle: RePEc:eso:journl:v:34:y:2003:i:3:p:211-228
    as

    Download full text from publisher

    File URL: http://www.esr.ie/Vol34_3Asici.pdf
    File Function: First version, 2003
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ross Levine, 1990. "Financial structure and economic development," International Finance Discussion Papers 381, Board of Governors of the Federal Reserve System (U.S.).
    2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 379-408.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 1-48.
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    6. Roberto Chang & Andrés Velasco, 2000. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 11-78, National Bureau of Economic Research, Inc.
    7. Favero, Carlo A. & Giavazzi, Francesco, 2002. "Is the international propagation of financial shocks non-linear?: Evidence from the ERM," Journal of International Economics, Elsevier, vol. 57(1), pages 231-246, June.
    8. Roberto Chang & Andrés Velasco, 2000. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Chapters,in: NBER Macroeconomics Annual 1999, Volume 14, pages 11-78 National Bureau of Economic Research, Inc.
    9. Roberto Rigobon, 1999. "On the Measurement of the International Propagation of Shocks," NBER Working Papers 7354, National Bureau of Economic Research, Inc.
    10. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
    11. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
    12. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
    13. Sergio Rebelo & Carlos A. Vegh, 2006. "When Is It Optimal to Abandon a Fixed Exchange Rate?," NBER Working Papers 12793, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Robert Trudel, 2005. "Effects of Exchange Rate Regime on IMF Program Participation," Review of Policy Research, Policy Studies Organization, vol. 22(6), pages 919-936, November.
    2. Emilija Beker, 2006. "Exchange rate arrangements from extreme to normal," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 53(1), pages 31-49, March.
    3. Ahmet Atil Asici & Nadezhda Ivanova & Charles Wyplosz, 2008. "How to exit from fixed exchange rate regimes?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(3), pages 219-246.
    4. Michael Frömmel, 2010. "Volatility Regimes in Central and Eastern European Countries’ Exchange Rates," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 2-21, February.
    5. Mrs. Gilda C Fernandez & Mr. Cem Karacadag & Rupa Duttagupta, 2004. "From Fixed to Float: Operational Aspects of Moving towards Exchange Rate Flexibility," IMF Working Papers 2004/126, International Monetary Fund.
    6. Ms. Enrica Detragiache & Mr. Eisuke Okada & Mr. Ashoka Mody, 2005. "Exits from Heavily Managed Exchange Rate Regimes," IMF Working Papers 2005/039, International Monetary Fund.
    7. repec:tcd:wpaper:tep8 is not listed on IDEAS
    8. Ahmet Atil Asici, 2010. "Parametric and non-parametric approaches to exits from fixed exchange rate regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(4), pages 381-406.
    9. Bersch, Julia & Klüh, Ulrich H., 2007. "When countries do not do what they say: Systematic discrepancies between exchange rate regime announcements and de facto policies," Discussion Papers in Economics 2072, University of Munich, Department of Economics.
    10. Gerlach-Kristen, Petra, 2006. "Internal and external shocks in Hong Kong: Empirical evidence and policy options," Economic Modelling, Elsevier, vol. 23(1), pages 56-75, January.
    11. Lin, Shu & Ye, Haichun, 2011. "The role of financial development in exchange rate regime choices," Journal of International Money and Finance, Elsevier, vol. 30(4), pages 641-659, June.
    12. Sébastien Wälti, 2005. "The duration of fixed exchange rate regimes," The Institute for International Integration Studies Discussion Paper Series iiisdp96, IIIS.
    13. Sean Barrett, 2005. "Risk Equalisation and Competition in the Irish Health Insurance Market," Trinity Economics Papers 200058, Trinity College Dublin, Department of Economics.
    14. Hans Genberg & Alexander K. Swoboda, 2005. "Exchange Rate Regimes: Does What Countries Say Matter?," IMF Staff Papers, Palgrave Macmillan, vol. 52(si), pages 1-8.
    15. Pierre-Richard Agenor, 2004. "Orderly exits from adjustable pegs and exchange rate bands," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 7(2), pages 83-108.
    16. Sfia, Mohamed Daly, 2007. "Régimes de change: Le chemin vers la flexibilité," MPRA Paper 4085, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jeffrey A. Frankel, 2010. "Monetary Policy in Emerging Markets: A Survey," NBER Working Papers 16125, National Bureau of Economic Research, Inc.
    2. Fiess, Norbert & Shankar, Rashmi, 2009. "Determinants of exchange rate regime switching," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 68-98, February.
    3. Frankel, Jeffrey, 2010. "Monetary Policy in Emerging Markets," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 25, pages 1439-1520, Elsevier.
    4. Ahmet Atil Asici & Nadezhda Ivanova & Charles Wyplosz, 2008. "How to exit from fixed exchange rate regimes?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(3), pages 219-246.
    5. Yanping Zhao & Jakob Haan & Bert Scholtens & Haizhen Yang, 2014. "Leading Indicators of Currency Crises: Are They the Same in Different Exchange Rate Regimes?," Open Economies Review, Springer, vol. 25(5), pages 937-957, November.
    6. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126.
    7. Arminio Fraga & Daniel L. Gleizer, 2001. "Constrained Discretion and Collective Action Problems: Reflections on the Resolution of International Financial Crises," Working Papers Series 34, Central Bank of Brazil, Research Department.
    8. Joseph Joyce, 2011. "Financial Globalization and Banking Crises in Emerging Markets," Open Economies Review, Springer, vol. 22(5), pages 875-895, November.
    9. Nicolás Oviedo, 2022. "Deficit fiscal y tipo de cambio fijo: racionalizando una combinación insostenible," Young Researchers Working Papers 3, Universidad de San Andres, Departamento de Economia, revised Oct 2022.
    10. Janice Boucher Breuer, 2004. "An Exegesis on Currency and Banking Crises," Journal of Economic Surveys, Wiley Blackwell, vol. 18(3), pages 293-320, July.
    11. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    12. corrinne ho & robert n mccauley, 2004. "Living with flexible exchange rates:," International Finance 0411003, University Library of Munich, Germany.
    13. Ito, Hiro, 2004. "Is Financial Openness a Bad Thing? An Analysis on the Correlation Between Financial Liberalization and the Output Performance of Crisis-Hit Economies," Santa Cruz Department of Economics, Working Paper Series qt5zb2v4c5, Department of Economics, UC Santa Cruz.
    14. Esaka, Taro, 2010. "Exchange rate regimes, capital controls, and currency crises: Does the bipolar view hold?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(1), pages 91-108, February.
    15. Jing, Zhongbo, 2015. "On the relation between currency and banking crises in developing countries, 1980–2010," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 267-291.
    16. Chiţu, Livia, 2012. "Was unofficial dollarisation/euroisation an amplifier of the 'Great Recession' of 2007-09 in emerging economies," Working Paper Series 1473, European Central Bank.
    17. Wee Chian Koh & M. Ayhan Kose & Peter S. Nagle & Franziska L. Ohnsorge & Naotaka Sugawara, 2020. "Debt and Financial Crises," Koç University-TUSIAD Economic Research Forum Working Papers 2001, Koc University-TUSIAD Economic Research Forum.
    18. Elisabetta Falcetti & Merxe Tudela, 2008. "What do Twins Share? A Joint Probit Estimation of Banking and Currency Crises," Economica, London School of Economics and Political Science, vol. 75(298), pages 199-221, May.
    19. Carmen M. Reinhart & Vincent Raymond Reinhart, 2002. "What Hurts Emerging Markets Most? G3 Exchange Rate or Interest Rate Volatility?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 133-170, National Bureau of Economic Research, Inc.
    20. Reuven Glick & Michael M. Hutchison, 1999. "Banking and currency crises; how common are twins?," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.

    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F30 - International Economics - - International Finance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eso:journl:v:34:y:2003:i:3:p:211-228. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Aedin Doris (email available below). General contact details of provider: https://www.esr.ie .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.