This paper adopts and develops the "fear of floating" theory to explain the decision to implement a de facto peg, the choice of anchor currency among multiple key currencies, and the role of central ...bank independence for these choices. We argue that since exchange rate depreciations are passed-through into higher prices of imported goods, avoiding the import of inflation provides an important motive to de facto peg the exchange rate in import-dependent countries. This study shows that the choice of anchor currency is determined by the degree of dependence of the potentially pegging country on imports from the key currency country and on imports from the key currency area, consisting of all countries which have already pegged to this key currency. The fear of floating approach also predicts that countries with more independent central banks are more likely to de facto peg their exchange rate since independent central banks are more averse to inflation than governments and can de facto peg a country's exchange rate independendy of the government.
A number of previous studies have questioned the dominant role of Germany within the European Monetary System (EMS). These conclusions are often based on empirical findings that the interest rates of ...EMS member countries are not affected by German interest rates, even in the long run. In this study, we demonstrate that intra-EMS interest rate differentials (vis-à-vis Germany) exhibit mean-reverting behavior characterized by long-memory dynamics. In a system incorporating six EMS countries and one non-EMS country (the U.S.A.), estimates from a fractional error correction model suggest the presence of short-run intra-EMS monetary-policy interdependencies but validate the German Dominance Hypothesis in the long run.
Since the 1997 Asian financial crisis and the launch of the European Economic and Monetary Union shortly afterward, a growing number of studies have considered the idea of a so-called Asian Monetary ...System, mostly adopting the European Monetary System as its model. The operational adjustment burdens in the European Monetary System were asymmetrically distributed, however, in particular between Germany and the other member countries. The emulation of such an asymmetric system in East Asia is not likely to be sustainable, due to the much lower support for regional integration there than was the case in Europe. For a future Asian Monetary System to be sustainable, it should be designed in such a way as to promote symmetry in the adjustment burdens arising from its operation. To this end, it may be desirable for the Asian Monetary System to employ an exchange rate and intervention mechanism that levies adjustment burdens largely on participant currencies deviating substantially from the average member currency movements. This mechanism should also be constructed in such a way that each currency's probability of identification as a deviant currency is similar.
This paper provides an alternative interpretation of the euro crisis to the dominant sovereign debt narrative. I argue that at the core of the euro crisis is a balance of payments disequilibrium-only ...this time the balance of payments crisis is taking place within a common currency. The frame of reference-sovereign debt crisis or balance of payments crisis-makes a significant difference not only for determining the causes of the euro crisis but also for the adequacy of policy measures to address the crisis. The sovereign debt crisis narrative has missed the interrelated nature of the macroeconomic imbalances within the eurozone. Despite the expectation of many observers at the time of the creation of the euro that the common currency would distribute the burden of adjustment more evenly across its member countries, the reverse is actually true. Compared to the European Monetary Union's predecessor regime, the European Monetary System (EMS), deficit countries are saddled with even higher adjustment costs in the common currency than before. In particular, they no longer have the tool of a nominal exchange rate change to address balance of payments disequilibria. This situation allows surplus countries-most importantly Germany-to exercise leverage over the key bargaining issues at stake in solving the eurozone crisis.
There is a spectrum of policy options available in dealing with dollarization in the transitional economies of Southeast Asia. These range from official dollarization at one end and enforced ...de-dollarization at the other. In between lie: currency board arrangements (CBAs), single currency options; and the muddling through approach. Both official dollarization and CBAs are not viable options for these countries. Official dollarization is politically untenable, while implementing a credible CBA is currently beyond the financial capacity of these countries. The single currency option remains somewhat vague in terms of detail, in relation to both design and time frame, and the region is unlikely to meet Optimal Currency Area (OCA) criteria. Lao PDR attempted to enforce de-dollarization in 1997, but the result was counter-productive. The muddling through but accelerating reforms approach appears to be the most realistic option. This approach views the multiple currency phenomenon (MCP) not so much as the problem, but rather as a symptom. The causes of the problem emanate from macroeconomic instability, political uncertainty, an underdeveloped financial and monetary system, and weak legal and institutional systems. Addressing these problems directly should eventually remove the symptom in the form of the MCP.
One probable consequence of the Dollar crisis is the initiation of an attempt to effect a major reform of the international monetary system. The agenda for any future discussions on reform is bound ...to be long and varied. The present article, rather than providing a comprehensive survey of all the issues, focuses on the relationship between two of the proposed reforms that appears to have escaped attention up to now. The author considers the proposal to make the SDR the basic reserve asset in the system and the proposal for an “aid link”. It is argued that for the monetary success of SDRs it is important that they pay competitive interest rates, thus reducing the value of seignorage that could be distributed to less-developed countries through an aid link. However, there is no reason why the remaining seignorage should not be distributed on aid-link principals. JEL: E42, F33, F35
The International Monetary Fund (IMF) is in the process of re-inventing itself with bilateral and multilateral surveillance emerging as a key function. The paper analyses how IMF surveillance ...announcements may be influenced by political power that member countries exert at the IMF. First, we analyze the content of Article IV Public Information Notices (PIN), and second, we use the financial market reaction to the released PINs as tools to identify the role of political economy factors for IMF surveillance. For a set of emerging market economies, the paper finds that financial markets react more favorable to PIN releases for politically influential member countries. Moreover, IMF surveillance appears to be systematically more favorable for countries with larger IMF loans outstanding, consistent with the finding in the literature that the IMF may engage in ‘defensive surveillance’.
► IMF surveillance is influenced by political power that member countries exert at the IMF. ► We analyse Article IV Public Information Notices (PIN) and financial market reactions. ► Financial markets react more favorable to PIN releases for politically influential member countries. ► Evidence shows that the IMF engages in ‘defensive surveillance’.
In the thirty years before Economic and Monetary Union was achieved, European currency policies varied widely among countries and over time. In this article, I argue that the sectoral impact of ...regional exchange-rate arrangements, in particular their expected real effects on European trade and investment, exerted a powerful influence on the course of European monetary integration. The principal benefit of fixing European exchange rates was facilitation of cross-border trade and investment within the European Union (EU); the principal cost of fixed rates was the loss of national governments' ability to use currency policy to improve their producers' competitive position. Empirical results indeed indicate that a stronger and more stable currency was associated with greater importance of manufactured exports to the EU's hard-currency core, while depreciations were associated with an increase in the net import competition faced by the country's producers. This suggests a powerful impact of real factors related to trade and investment, and of private interests concerned about these factors, in determining national currency policies.
The so-called German Dominance Hypothesis (GDH) claimed that Bundesbank policies were transmitted into other European Monetary System (EMS) interest rates during the pre-euro era. We reformulate this ...hypothesis for the Central and Eastern European (CEE) countries that are on the verge of accessing the eurozone. We test this “Euro Dominance Hypothesis (EDH)” in a novel way using a global vector autoregressive (GVAR) approach that combines country-specific error correction models in a global system. We find that euro area monetary policies are transmitted into CEE money market rates, providing evidence for monetary integration between the eurozone and CEE countries. Our framework also allows for introducing global monetary shocks to provide at least tentative empirical evidence regarding the effects of the recent financial crisis on monetary integration in Europe.
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