Transcript E. LEVY-YEYATI: Fear of Floating in Reverse

Fear of Floating in Reverse:
Exchange Rate Policy in the 2000s
Eduardo Levy Yeyati
The World Bank & Universidad Torcuato Di Tella
Federico Sturzenegger
Kennedy School, Harvard Univ. & Universidad Torcuato Di Tella
May, 2007
1
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
Exchange rate regimes in the 2000s: Classification
• 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
Regime in the 2000s: Nothing changed?
100%
Float
80%
Int
60%
40%
Fix
20%
0%
1974
1978
Source: LYS (2006)
1982
1986
1990
1994
1998
2002
Fear of flying: A characterization
• 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 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
Dlog (Real bilateral exchange rate)
(t) (t, t+1) (t, t+2) (3-y avg, t+1)
int1 (t)
0.036*
0.109**
(0.022)
(0.055)
int1 (t, t+1)
0.072**
(0.029)
int1 (t, t+2)
0.090**
(0.040)
R-squared
0.989
0.99
0.991
0.99
Additional controls: country and time FE, terms of trade, GDP of trade
partners, net inflows.
…at the cost of inflation pressures
∆%Inflation ∆%Deflator ∆%Deflator - ∆%Inflation
(t)
(t)
(t)
int1 (t)
0.192
1.542**
0.803**
(0.602)
(0.720)
(0.364)
int1 (t-1)
-0.65
-2.170***
-0.026
(0.502)
-0.654
(0.367)
R-squared
0.65
0.64
0.119
Additional controls: country and time FE, dlog(M2), dlog(GDP), dl(RER),
lagged dep. var.
Intervention & growth
dlog(GDP)
dlog(GDP per worker)
(3y avg; t+1)
(3y avg; t+1)
int1 (t-1, t-3) 2.789***
1.728***
(0.459)
-0.578
int1 (t)
1.352**
0.791
(0.661)
-0.808
R-squared
0.446
0.464
0.306
0.363
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?
BK trend HP trend BK cycle HP cycle
int1 (t-1, t-3) 1.781*** 0.009***
(0.305)
(0.002)
int1 (t)
0.599*** 0.011***
(0.222)
(0.003)
R-squared
0.469
0.627
0.415
0.312
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
int1(t)
int1 (t-1, t-3)
R-squared
Savings (% GDP)
(t+1)
1.044**
(0.474)
1.154
(0.738)
0.805
Real Inv. (% GDP)
(t+1)
(3Y avg; t+1)
1.784***
4.142***
-0.304
-1.224
0.692*
-0.375
0.829
0.656
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?
int1 (t)
int1 (t-1)
∆%GDP (t)
R-squared
Labor/Capital Compensation Unemp (%)
-3.041*
-0.439**
(1.787)
(0.20)
-5.872**
0.244
(2.885)
(0.19)
-0.036*
(0.02)
0.787
0.783
0.925
Additional controls: country and time FE, terms of trade, GDP of trade
partners, net inflows, lagged dlog(product), dlog(pop)
Example
exports
consumption
100
100
2006.IV
250
2005.IV
150
2004.IV
400
2003.IV
200
2002.IV
550
2001.IV
250
Example
IPC
exports
consumption
100
100
2006.IV
250
2005.IV
150
2004.IV
400
2003.IV
200
2002.IV
550
2001.IV
250
Example
IPC
exports
GDP
consumption
100
100
2006.IV
250
2005.IV
150
2004.IV
400
2003.IV
200
2002.IV
550
2001.IV
250
Example
IPC
Precio implicito del PBI
real w age
100
0
2006.IV
50
2005.IV
150
2004.IV
100
2003.IV
200
2002.IV
150
2001.IV
250
Example
IPC
Precio implicito del PBI
real w age
real w age (formal)
100
0
2006.IV
50
2005.IV
150
2004.IV
100
2003.IV
200
2002.IV
150
2001.IV
250
Example
GDP by production factor
100%
Other
80%
Labor
compensation
60%
40%
Capital benefits
20%
0%
2001
2002
2003
2004
2005*
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
Fear of Floating in Reverse:
Exchange Rate Policy in the 2000s
Eduardo Levy Yeyati
The World Bank & Universidad Torcuato Di Tella
Federico Sturzenegger
Kennedy School, Harvard Univ. & Universidad Torcuato Di Tella
May, 2007
22
De facto regimes over the years: Classification
 Exchange rate volatility (e): average of the absolute
value of monthly changes in the exchange rate
 Volatility of exchange rate changes (De ): 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
Regime
e
De
R
Float
Low
Low
High
Intermediate
Med
Med
Med
Fix
High
Low
Low