After After Bretton Woods Agreement Bretton Woods Agreement Exchange Rate Regime Exchange Rate Regime Classification in IME Classification in IMF (2014) de jure classification(1975-1998 IMF judges the regime based on the stated commitment of de facto classification(since 1999) their de facto policies after asian Crisis information on each country's 1 eserves and official and secondary market rates floating 39 Choice of Exchange Rate regime The Impossible Trinity A nation s choice as to which currency regime to follow The forces of international economics do not alloy eflects national priorities about all facets of the the simultaneous achievement of all three conomy, including inflation, unemployment, interest rate levels, trade balances, and economic growth The choice between fixed and flexible rates may change over time as priorities change. However, increasing capital mobility complicates the hoices after 1970s Any currency will encounter the"impossible trinity Pure floating ntegration2016/11/2 3 After Bretton Woods Agreement 4-13 After Bretton Woods Agreement 4-14 Exchange Rate Regime Classification in IMF • de jure classification (1975-1998) – IMF judges the regime based on the stated commitment of the central bank; • de facto classification (since 1999) – IMF began to characterize countries’ regimes based on their de facto policies after Asian Crisis – Available information on each country’s exchange rate and monetary policy framework; observed movements on reserves and official and secondary market rates; quantitative and qualitative analysis 4-15 Exchange Rate Regime Classification in IMF (2014) 16 Number of Countries and Regions Examples No separate Legal Tender 13 Ecuador, San Marino Currency Board 12 HK SAR, Bulgaria, Lithuania Conventiona Peg 44 Aruba, Jordan Stabilized arrangement 21 Guyana, FYR Macedonia, Singapore, Vietnam Crawling peg 2 Nicaragua, Botswana Crawl-like arrangement 15 Honduras, Ethiopia, China, Argentina Pegged echange rate within horizontal bands 1 Tonga Other arrangements 18 Cambodia, Czech Rep., Russia, Costa Rica Floating 36 Afghanistan, Brazil, Korea, Thailand, New Zealand Free floating 39 US, Australia, Canada, Chile, Japan, Mexico, Norway, Poland, Sweden, UK, Somalia, EMU Choice of Exchange Rate Regime • A nation’s choice as to which currency regime to follow reflects national priorities about all facets of the economy, including inflation, unemployment, interest rate levels, trade balances, and economic growth. • The choice between fixed and flexible rates may change over time as priorities change. • However, increasing capital mobility complicates the choices after 1970s. • Any currency will encounter the “impossible trinity” problem. 4-17 The Impossible Trinity • The forces of international economics do not allow the simultaneous achievement of all three 4-18 Pure floating Full capital controls Monetary independence Monetary union Full financial integration Exchange rate stability Increased capital mobility