Working Paper Managed floating: Understanding the new international monetary order

Transcription

1 econsor Der Open-Access-Publikaionsserver der ZBW Leibniz-Informaionszenrum Wirschaf The Open Access Publicaion Server of he ZBW Leibniz Informaion Cenre for Economics Bofinger, Peer; Wollmershäuser, Timo Working Paper Managed floaing: Undersanding he new inernaional moneary order Würzburg economic papers, No. 30 Provided in Cooperaion wih: Universiy of Würzburg, Chair for Moneary Policy and Inernaional Economics Suggesed Ciaion: Bofinger, Peer; Wollmershäuser, Timo (2001) : Managed floaing: Undersanding he new inernaional moneary order, Würzburg economic papers, No. 30 This Version is available a: hp://hdl.handle.ne/10419/48479 Nuzungsbedingungen: Die ZBW räum Ihnen als Nuzerin/Nuzer das unengelliche, räumlich unbeschränke und zeilich auf die Dauer des Schuzrechs beschränke einfache Rech ein, das ausgewähle Werk im Rahmen der uner hp:// nachzulesenden vollsändigen Nuzungsbedingungen zu vervielfäligen, mi denen die Nuzerin/der Nuzer sich durch die erse Nuzung einversanden erklär. Terms of use: The ZBW grans you, he user, he non-exclusive righ o use he seleced work free of charge, erriorially unresriced and wihin he ime limi of he erm of he propery righs according o he erms specified a hp:// By he firs use of he seleced work he user agrees and declares o comply wih hese erms of use. zbw Leibniz-Informaionszenrum Wirschaf Leibniz Informaion Cenre for Economics

2 W. E. P. Würzburg Economic Papers No. 30 Managed floaing: Undersanding he new inernaional moneary order Peer Bofinger and Timo Wollmershäuser Sepember 2001 (revised) Universiä Würzburg Lehrsuhl für Volkswirschafslehre, Geld und inernaionale Wirschafsbeziehungen Sanderring 2, D Würzburg Tel.: +49/931/

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4 Managed floaing: Undersanding he new inernaional moneary order Peer Bofinger and Timo Wollmershäuser Sepember 2001 Absrac Alhough here seems o be a broad consensus among economiss ha purely floaing or compleely fixed exchange raes (he so-called corner soluions) are he only viable alernaives of exchange rae managemen, many counries do no behave according o his paradigm and adop a sraegy wihin he broad specrum of exchange rae regimes ha is limied by he wo corner soluions. These inermediae regimes are characerized by significan foreign exchange marke inervenions of cenral banks and a cerain degree of exchange rae flexibiliy. We develop a new empirical mehodology ha idenifies hree differen forms of floaing on he basis of a cenral bank's inervenion aciviy: pure floaing (no inervenions), independen floaing (exchange rae smoohing), and managed floaing (exchange rae argeing). Our crosscounry sudy shows ha exchange rae argeing is a leas as imporan as exchange rae smoohing. Subsequenly we presen a moneary policy framework in which cenral banks use he exchange rae as an operaing arge of moneary policy. We explain he mechanics of inervenions and serilizaion and we explain why a cenral bank has an ineres of conrolling simulaneously he exchange rae and he shor-erm ineres rae. We derive he moneary policy rules for our wo operaing arges from a simple open economy macro model in which he uncovered ineres pariy condiion and he Moneary Condiions Index play a cenral role. JEL classificaion: E 52, F 31, F 33, F 41 Keywords: exchange rae regime, moneary policy, inervenions, serilizaion, floaing, Moneary Condiions Index iii

5 Conens 1 Inroducion Defining and idenifying hree forms of floaing Floaing : he predominan exchange rae regime in he New Millennium Three forms of floaing Governmens do no always ell he ruh A differen approach for idenifying hree varians of floaing A new mehod for measuring differen forms of floaing Daa descripion and proceeding Main resuls Wha can we learn from he lieraure? The Mundell-Fleming legacy Open economy inflaion argeing John Williamson s proposals A heoreical framework for managed floaing The exchange rae as an operaing arge of moneary policy The flow channel of inervenions maers Serilized inervenions can be effecive How can he coss of serilizaion be avoided Scope and limis of exchange rae argeing Inernal and exernal equilibrium under exchange rae argeing Inernal equilibrium Measuring he acual moneary policy sance: he concep of he acual MCI (MCI ) Deriving he opimal moneary policy sance: he concep of he opimal MCI (MCI op ) The inernal equilibrium rule Exernal equilibrium The privae invesor s exernal equilibrium The cenral bank s exernal equilibrium The overall exernal equilibrium and he cenral bank s inervenion response funcion A moneary policy framework for small open economies The advanages of managed floaing in comparison wih radiional exchange rae sraegies Absoluely fixed exchange raes Crawling pegs iv

6 1.4.3 Purely floaing exchange raes Overcoming he inconsisency riangle hrough managed floaing Unresolved issues of managed floaing In search of a new anchor for privae secor expecaions The conrol over he exchange rae is asymmeric Managed floaing and beggar-my-neighbor policies Seleced case sudies Slovenia Peru Poland Japan Conclusion...60 References...65 Appendix 1: Counry coverage...67 Appendix 2: Probabiliy disribuions...69 Appendix 3: The marke maker principle...73 Appendix 4: Derivaion of he opimal MCI based on he minimizaion of a cenral bank s loss funcion...75 Appendix 5: A simple framework for he explanaion of currency crises...76 Appendix 6: Seleced case sudies...78 v

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8 1 Inroducion In spie of heir prominence, he exchange rae regimes of floaing or managed floaing have so far received relaively lile academic ineres. Due o his fear of floaing of many researchers 1, unil oday even he cenral erms floaing and managed floaing lack a clear and widely shared definiion. We will show ha his can lead o some confusion which is especially problemaic for he opion of managed floaing. Above all a precise definiion would make clear ha his approach is concepually compleely differen from he exbook model of flexible exchange raes and also he more refined models of open economy inflaion argeing. In oher words, because of his semanic imprecision i has been overlooked ha managed floaing lacks a well-developed heoreical framework. As a consequence a cenral bank which wans o follow he popular approach of managed floaing can receive almos no guidance for is concree moneary and exchange rae policies. 2 The lack of a posiive as well as a normaive heory of managed floaing can also lead o negaive effecs a he inernaional level. While he inernaional moneary order is now dominaed by managed floaing, here has been no heoreical discussion wheher such uncoordinaed naional exchange rae and ineres rae policies will always lead o opimum oucomes for he global economy. The paper is organized as follows: In Chaper 2 we presen hree differen definiions of floaing: Pure floaing is an arrangemen where he exchange rae is almos always marke deermined; in oher words, he cenral bank normally refrains from exchange marke inervenions. As a benchmark for pure floaing, we use he exchange rae policy of he Unied Saes. Independen floaing is characerized by an acive inervenion policy which aims a a sabilizaion around a marke-deermined given rend of he exchange rae. Managed floaing is also characerized by an acive inervenion policy. In his case a cenral bank s inervenion policy follows an unannounced arge pah for he exchange rae. 1 While here was some discussion of his issue in he 1980s, in he las few years here are almos no publicaions wih a ile ha is direcly relaed o exchange rae sysem of floaing or managed floaing; for insance, in EconLi since 1990 only 17 publicaions can be found under managed floa and 21 publicaions under managed floaing. 2 See Fischer (2001, p. 7) abou foreign exchange marke inervenions in sysem of managed floaing: This is one of he remaining areas in which cenral bankers place considerable emphasis on he ouch and feel of he marke, and where sysemaic policy rules are no ye common. 1

9 On his basis we develop a simple mehod for idenifying hese hree differen forms of floaing. Compared wih he mehods by Calvo and Reinhar (2000), our approach has he advanage ha i allows a clear demarcaion beween he hree varians of floaing. In Chaper 3 we give a shor survey of he lieraure. We show ha he Mundell/Fleming model as well as he more refined models for open economy inflaion argeing are unable o explain he high inervenion aciviy of many cenral banks which is geared owards achieving a cerain exchange rae pah. In Chaper 4 we presen a simple heoreical framework for managed floaing. I is based on he somewha unfamiliar noion of using he exchange rae as an operaing arge of moneary policy in addiion o he shor-erm ineres rae. We analyze he condiions under which such an exchange rae argeing is possible. In he cenral par of his Chaper we show how in an open economy a cenral bank has o se is wo operaing arges in order o achieve simulaneously inernal equilibrium which defined by an MCI which minimizes a social loss funcion, exernal equilibrium which is defined by a combined ineres and exchange rae policy ha is compaible wih uncovered ineres pariy. The las par of Chaper 4 discusses he shorcomings and implicaions of managed floaing. As managed floaing is characerized by an unannounced exchange rae pah, a separae anchor for privae secor expecaions is required in small open economies. We argue ha in he same way as in large economies inflaion argeing can provide a subsiue for his funcion. A major shorcoming of managed floaing is he limied abiliy of cenral banks o defend an exchange rae pah in a siuaion of srong speculaive ouflows. Such shocks would require a policy-mix wih very high real ineres raes ha can lead o negaive effecs for he domesic secor of an economy. For his case credi faciliies in he form of he IMF s Coningen Credi Line are he only adequae soluion. Finally, under an uncoordinaed managed floaing counries can manipulae he exchange rae in order o improve heir inernaional compeiiveness. The srong increase in dollar reserves of emerging marke economies during he 1990s indicaes ha such consideraions have played an imporan role in he exchange rae managemen of hese counries. 2

10 In Chaper 5 we ake a deeper look a he acual moneary and exchange rae policy of a few counries in our sample ha we idenify as managed floaers in Chaper 2. Wih a raher descripive approach we invesigae wheher hese counries effecively pursue a policy according o he rules which we derive formally in Chaper 4. The las Chaper summarizes he main resuls and concludes. 2 Defining and idenifying hree forms of floaing 2.1 Floaing : he predominan exchange rae regime in he New Millennium In he las decade he inernaional moneary order has undergone a dramaic ransformaion. Inermediae regimes which had been he prevailing exchange rae arrangemen in he early 1990s are now only used by abou one hird of he IMF s member counries (see Table 1). In he group of developing and emerging marke economies he decline has been even more pronounced. For he counry groupings of all counries and of emerging marke economies floaing has been he preferred alernaive o inermediae regimes. Table 1 shows ha for all hree counry groupings floaing has become he predominan exchange rae arrangemen. Hard pegs could also profi from he vanishing middle, especially in developing counries, bu heir marke share remains much lower han he share of floaing. Table 1: Exchange rae arrangemens 1991 and 1999 Hard Pegs Inermediae Floaing Year All counries 16% 24% 62% 34% 23% 42% Emerging marke 6% 9% 64% 42% 30% 48% economies Developing and emerging marke economies 5% 25% 65% 27% 29% 47% Source: Fischer (2001) In he lieraure his hollowing ou has been widely welcomed and is even recommended as an opimum soluion for almos all counries (Fischer 2001, Frankel 1999, Summers 2000). Barry Eichengreen (1999, p. 105) has become a specially prominen promoer of his approach: Hence, he IMF needs o more forcefully encourage is members o move o policies of greaer exchange rae flexibiliy, and he sooner he beer. Wih few excepions i should pressure is members, in he conex of Aricle IV consulaions and program discussions, o 3

11 abandon simple pegs, crawling pegs, narrow bands and oher mechanisms for limiing exchange rae flexibiliy before hey are forced o do so by he markes. 2.2 Three forms of floaing As Table 1 shows, in many policy-relaed discussions he specrum for exchange rae arrangemens is reduced o he hree cenral opions of hard pegs, inermediae regimes, and floaing. While his gives some impression on he main choices, an undersanding of managed floaing requires a more deailed classificaion. In our view, he IMF s Inernaional Financial Saisics classificaion of exchange regimes is quie useful in his regard. I uses he following eigh caegories: a. Exchange rae arrangemens wih no separae legal ender (dollarisaion, membership in a currency union) b. Currency board arrangemens c. Oher convenional fixed peg arrangemens (formal or de faco peg wih a narrow margin of a mos ± 1 per cen around a cenral rae) d. Pegged raes wihin horizonal bands (formal or de faco peg wih margins ha are wider han ± 1 per cen around a cenral rae) e. Crawling pegs (he currency is adjused periodically in small amouns a a fixed, preannounced rae or in response o changes in selecive quaniaive indicaors) f. Crawling bands (he currency is mainained wihin cerain flucuaion margins around a cenral rae ha is adjused periodically in small amouns a a fixed, pre-announced rae or in response o changes in selecive quaniaive indicaors) g. Managed floaing (no pre-announced pah for he exchange rae; he moneary auhoriy influences he movemen of he exchange rae hrough acive inervenion in he foreign exchange marke wihou specifying, or pre-commiing o, a pre-announced pah for he exchange rae) h. Independen floaing (he exchange rae is marke deermined, wih any foreign exchange marke inervenion aimed a moderaing he rae of change and prevening undue flucuaions in he exchange rae, raher han esablishing a level for i) A leas from a heoreical poin of view i seems useful o add an addiional caegory: 4

12 i. Pure floaing (he exchange rae is marke deermined wih no foreign exchange marke inervenion a all; changes in foreign exchange reserves are due o echnical facors only). As already menioned, many auhors summarize he arrangemens g), h), and i) under he heading of floaing. This can creae he impression ha he economic raionale of hese hree arrangemens is more or less idenical. However, a careful reading of he IMF s descripion of g) and h) and of our caegory i) shows a very imporan difference: Managed floaing implies ha he exchange rae pah is deermined by he cenral bank (or he governmen). Pure and independen floaing imply ha he exchange rae pah is mainly marke deermined. In oher words, wha disinguishes managed floaing from he inermediae soluions e) and f) is no a differen form of exchange rae deerminaion, i is mainly he fac ha here is no preannounced pah for he exchange rae (see Figure 1). Figure 1: Exchange rae regimes classificaion of exchange rae regimes exchange rae is mainly marke deermined pure and independen floaing exchange rae is mainly deermined by he moneary auhoriies exchange rae argeing no preannounced arge managed floa preannounced arge variable arge crawling pegs consan arge fixed exchange raes wih cenral bank fixed peg wihou cenral bank currency board 5

13 As a consequence, for a heoreical undersanding of managed floaing i is no sufficien o rea i simply as a varian of independen or pure floaing, for which he elaborae heories of flexible exchange raes are available. The very fac, ha under managed floaing cenral banks ry o arge he exchange rae requires a posiive analysis of his policy, as well as a normaive heory designing policy rules for managed floaing. 2.3 Governmens do no always ell he ruh The need for a precise definiion of floaing exchange regimes applies no only o economiss. As he research by Calvo and Reinhar (2000) has shown, naional governmens and/or cenral banks do no seem o pay oo much aenion o he exac definiions in he IMF s forms. The saring poin for Calvo and Reinhar is he exbook model of flexible exchange raes (or our opion pure floaing ) which is characerized by a consan level of foreign exchange reserves. Therefore, Calvo and Reinhar idenify floaing (in our axonomy: pure floaing ) by a high probabiliy ha he monhly per cen change in foreign exchange reserves falls wihin a ± 1 or ± 2.25 per cen band. As here are always echnically deermined changes in reserves, Calvo and Reinhar use he daa of he Unied Saes and Japan as a benchmark. In oher words, a lower probabiliy for small reserve changes is regarded as an indicaion ha a counry is no following a policy of floaing (in or axonomy; pure floaing ). The polar case of fixed exchange raes is characerized by a low probabiliy ha he monhly per cen change in nominal exchange rae falls wihin a ± 1 or ± 2.25 per cen band. Again, he Unied Saes and Japan are used as a benchmark. Table 2 presens he main resuls of he sudy by Calvo and Reinhar Regime Table 2: Main resuls of he Calvo and Reinhar (2000) sudy Foreign exchange reserves volailiy +/- 1 +/ per cen band per cen band Exchange rae volailiy +/- 1 per cen band +/ per cen band Independen floaing Managed floaing Limied flexibiliy Fixed USA Japan Source: Calvo and Reinhar (2000) 3 Excluding Japan and he Unied Saes 6

14 The mos sriking resul of his sudy is he very small difference beween he polar opions of independen floaing and fixed raes as far as he changes in foreign exchange reserve volailiy are concerned. In addiion he independen floaers behave compleely differen han he wo benchmark counries. The same applies o he caegory managed floaing. In oher words, mos of he counries which classify hemselves as independen or managed floaers are acively inervening on he foreign exchange marke. The exchange rae volailiy of independen and managed floaers is also much lower han in he Unied Saes and Japan and if is analyzed wihin he ± 2.25 per cen band, he difference o fixed raes is no very pronounced, especially for managed floaing. In sum, he resuls of Calvo and Reinhar as well as of a relaed sudy by Levy-Yeyai and Surzenegger (2000) show ha i is imporan o make a clear disincion beween he exbook ideal of free floaing and he realiy of independen and managed floaing. 2.4 A differen approach for idenifying hree varians of floaing While he sudy by Calvo and Reinhard has conribued o a much beer undersanding of floaing, i has he imporan drawback ha i canno disinguish beween he hree differen forms of floaing. Anoher problem of his sudy is ha i analyses very long periods (up o February 1973 April 1999). This can have he disadvanage ha a singular srong inervenion aciviy or changes in inervenion behavior in he more recen pas canno no be idenified. Finally he Calvo/Reinhar sudy normalizes changes in reserves by relaing hem o reserve levels. This can be misleading if counries sar an inervenion period wih differen reserve levels alhough heir overall macroeconomic daa are roughly similar or if counries accumulae large reserve levels over ime A new mehod for measuring differen forms of floaing In order o avoid hese shor-comings, we presen a new mehodology for idenifying differen forms of floaing. We sar wih wo differen mehods o proxy he inervenion aciviy of a counry: 1. changes in foreign reserves minus gold (Res) as a raio of he exernal secor s size measured by a welve-monh moving-average of he arihmeic mean of impors (Im) and expors (Ex); 7

15 2. changes in foreign reserves minus gold (Res) as percenage of he level of reserves a he beginning of he underlying period. The firs normalizaion procedure has he advanage ha changes in reserves are relaed o he size of a counries exernal secor. To some exend his also akes ino accoun differences in he oal economic size. The second mehod was chosen o produce resuls ha are comparable o hose of he Calvo/Reinhar sudy. As a firs sep we wan o idenify he overall inervenion aciviy of a counry. For his purpose we add he absolue values of normalized changes in reserves for a period of n=6 and of n=12 monhs. Thus, we do no discriminae beween he monhly values of ne sales and ne purchases of foreign exchange reserves. The resuling variable is called sum of absolue changes (S abs1, S abs2 ): n abs1 Res i Res i 1 (1) S () n =, i= 0 Ex i + Im i Ex i 1 + Im i abs2 (2) S () n n Res i Res i 1 i= 0 =. Res n 1 The superscrips 1 and 2 refer o he mehod of normalizaion. If S abs is low (i.e. approaching zero), a counry s overall inervenion aciviy is low. As in Calvo and Reinhar (2000) we chose he U.S. as a benchmark which we assume o be a pure floaer. The difference beween he wo mehods of normalizaion can be illusraed quie easily wih he four chars of Figure 2. In he upper wo chars we depiced he proxies for he inervenion aciviy S abs1 and S abs2 for Japan and he US. While he wo lines differ only slighly in he case of he US, he differences in he conclusion ha one would draw in he case of Japan are sriking. According o he hin line (mehod 2) he Japanese exchange rae policy would be judged as a non-inervenionis one, similar o wha resuls for he US. In he sudy of Calvo and Reinhar (2000) which uses a similar echnique (monhly change in foreign exchange reserves as a percenage of he level of reserves) Japan is classified as even more independenly floaing han he US (see Table 2). The major problem wih his approach is he bias ha emerges wih an 8

16 increasing level of reserves. The same sale or purchase of foreign exchange measured in US dollars becomes less imporan he higher he base in erms of which he percenage change is measured. From he lower wo chars we can see ha he Japanese auhoriies accumulaed large amouns of foreign reserves during he las wo decades (he figures depiced are in millions of US dollars). The average rae of growh amouned o a muliple of he rae of growh of he exernal secor. In conras o his, he wo variables seem o have a common long-run rend in he US so ha he measuremen bias described above does no occur. This explains why he wo mehods approximaely yield he same resuls for he US. In order o eliminae such a bias, in he following we only use he second normalizaion mehod. Figure 2: Differen mehods of proxying inervenion aciviy Inervenion aciviy Japan mehod 1 mehod Inervenion aciviy USA mehod 1 mehod M1 1977M1 1979M1 1981M1 1983M1 1985M1 1987M1 1989M1 1991M1 1993M1 1995M1 1997M1 1999M1 1975M1 1977M1 1979M1 1981M1 1983M1 1985M1 1987M1 1989M1 1991M1 1993M1 1995M1 1997M1 1999M Japan (expors + impors) / 2 oal reserves minus gold USA (expors + impors) / 2 oal reserves minus gold 1975M1 1977M1 1979M1 1981M1 1983M1 1985M1 1987M1 1989M1 1991M1 1993M1 1995M1 1997M1 1999M1 1975M1 1977M1 1979M1 1981M1 1983M1 1985M1 1987M1 1989M1 1991M1 1993M1 1995M1 1997M1 1999M1 In a second sep we calculae he sum of effecive changes (S eff1, S eff2 ) of reserves again for a 6 and a 12 monh period: n eff1 (3) () Res i Res i 1 S n =, i= 0 Ex i + Im i Ex i 1 + Im i

17 2 (4) S eff () n n ( Res Res ) i i 1 i= 0 =. Res n 1 We hen divide he sum of effecive changes by he sum of absolue changes of reserves for each normalizaion mehod and for each ime horizon. The resuling raio allows us o differeniae beween independen floaers and managed floaers. We herefore labeled i index of floaing (I floa ): eff1 () () floa1 S n (5) I () n =, abs1 S n eff 2 () () floa2 S n (6) I () n =. abs2 S n I floa assumes values ranging from minus one o plus one. A value close o zero indicaes ha a cenral bank has no changed is oal level of reserves during an observaion period. As his is compaible wih a high value of he denominaor, a low value of I floa shows ha inervenions were mainly carried ou in order o smooh shor-erm flucuaions around an exogenously deermined rend. This behavior is ypical for a sraegy of independen floaing as i is defined by he IMF. A value of I floa close o plus or minus one implies ha he inervenion aciviy was associaed wih a change in reserves during he observaion period. This can be regarded as an indicaion ha a cenral bank has ried o influence he rend of he exchange rae. Thus, such values of I floa can be regarded as a marker for managed floaing. In addiion, he sign of his indicaor shows wheher he cenral bank has ried o inervene agains an appreciaion (a posiive sign: ne purchases of he cenral bank) or a depreciaion (a negaive sign: ne sales of he cenral bank) of is currency Daa descripion and proceeding Our sample consiss of 14 developed marke economies and 30 emerging marke economies 4 ha have been classified as independen or managed floaers according o he IMF s quarerly 4 We disinguish beween developed marke economies and emerging marke economies as in Fischer (2001). This resricion allows us o concenrae on he subse of developing counries which are inegraed wih world capial 10

18 Exchange Rae Arrangemens published in he Inernaional Financial Saisics (IFS). Our daa is monhly from January 1975 o November The variables used in our calculaions are all from he IFS. Reserves (Res) are measured by Toal Reserves minus Gold (line 1l.d), expors and impors by line 70 and 71. If he laer were denominaed in naional currency, we convered hem ino US dollars wih he average monhly dollar exchange rae (line rf). For each monh during he period ha a counry repors is exchange rae regime as an independen or a managed floaer we calculaed he wo variables of ineres S abs and I floa. The periods and he repored regimes are summarized in Table 8 (see Appendix 1: Counry coverage). Since some counries followed differen exchange rae sraegies in he whole period, we ge a oal of 65 cases for he 6-monh horizon and 62 cases for he 12-monh horizon. We hen compued he frequency disribuion of each variable for each period. For our classificaion of exchange rae regimes we proceed as follows. In a firs sep we ry o find ou wheher a counry is a pure floaer or no. For his purpose we look a he value of S abs of our benchmark counry, he Unied Saes. We see ha for boh ime horizons here is a 100 % probabiliy ha he sum of absolue reserve changes is less han he average of he sum of monhly impors and expors during he observaion periods (i.e. S abs 1.0, see Table 10 and Table 11 in Appendix 2: Probabiliy disribuions). For he 6-monh horizon he Unied Kingdom (09/92-11/00), Canada and Poland (04/00-11/00) can also be regarded as pure floaers. For he 12-monh horizon only he Unied Kingdom (09/92-11/00) can qualify as a pure floaer; for Poland he experience wih floaing is no long enough. For hose counries which canno be no classified as pure floaers we ry o idenify wheher heir inervenion policy can be classified as independen or managed floaing. For his purpose we use he index floaing. We assume ha a range of 0.33 < I floa < 0.33 describes independen floaing; he ranges of 1 I floa 0.33 and 0.33 I floa 1 are regarded as a policy of managed floaing. If he probabiliy of 0.33 I floa < 0.33 is a leas 50 %, we classify a counry as an independen floaer, if i is lower a counry is classified as a managed floaer. Since we lack a benchmark counry, he inervenions of he Unied Saes are o small o be used for his markes. As we were also ineresed in he exchange rae policy of he Easern European accession counries, we addiionally included Slovenia in our analysis. 11

19 purpose, we had o chose hese criical values somewha arbirarily. Figure 3 gives an overview of his classificaion procedure. Figure 3: A classificaion of floaing exchange rae sysems Disribuion of S abs Prob(S abs = 1) = 1 pure floaing Prob(S abs = 1) < 1 oher floaing Disribuion of I floa Prob(-0.33 < I floa < 0.33) 0.5 independen floaing (exchange rae smoohing) Prob(-0.33 < I floa < 0.33) < 0.5 managed floaing (exchange rae argeing) Main resuls A summary of he resuls of our classificaion is presened in Table 3 and Table 4 (for he deailed counry resuls see Table 12 and Table 13 in Appendix 2: Probabiliy disribuions). For he 6-monh observaion period hey show ha mos floaing counries can be regarded as managed floaers regardless wheher we focus on all regimes ha were in exisence in he whole period from 1975 unil 2000 or on hose here are sill in exisence. Only 23 % of he IMF s independen floaers are pure floaers or independen floaers according o our classificaion. For he 12-monh observaion period a more even disribuion beween independen and managed floaing emerges. Again here is no srong correlaion wih he IMF s classificaion: only 48 % of he IMF s independen floaers were rue independen floaers and only 46 % of he managed floaers were rue managed floaers. Thus, depending on he observaion period our analysis shows firs ha managed floaing is eiher he mos widely used form of floaing or a more or less equally imporan form of floaing as independen floaing. 12

20 IMF Table 3: IMF classificaion and our classificaion for floaing using 6-monh periods Our classificaion Sum Pure floa Independen Managed floa floa Independen floa 4 (4) 3 (2) 24 (15) 31 (21) classificaion Managed floa - 4 (0) 31 (10) 35 (10) Sum 4 (4) 7 (2) 55 (25) 66 (31) Noe: The figures in brackes indicae he number of regimes ha are sill in exisence. IMF Table 4: IMF classificaion and our classificaion for floaing using 12-monh periods Our classificaion Sum Pure floa Independen Managed floa floa Independen floa 2 (2) 11 (8) 14 (10) 27 (20) classificaion Managed floa - 19 (6) 17 (4) 36 (10) Sum 2 (2) 30 (14) 31 (14) 63 (30) Noe: The figures in brackes indicae he number of regimes ha are sill in exisence. The imporance of managed floaing becomes even more obvious if we use our mehodology for he analysis of ime series. Thus, we can observe for each counry how he values of S abs and I floa vary over ime. Of course his approach has he effec ha even wih a low overall probabiliy siuaions wih high values of S abs can be reached from ime o ime. The mos ineresing case is Japan. According o he cross-secion analysis which covers he period from 1975 o 2000 he probabiliy for high inervenions in Japan is relaively low so ha Japan is no very differen from he pure floaers (see Table 10 and Table 11 in Appendix 2: Probabiliy disribuions). However, he ime series for Japan show a quie differen picure (see Figure 2). Especially in he years 1999 and 2000 is inervenion aciviy is very high and i is associaed wih values of I floa ha exceed for mos of he ime which clearly indicaes ha he Japanese auhoriies argeed an exchange rae pah (see Figure 13 in Appendix 6: Seleced case sudies). In oher words, here has been a clear regime change which canno be deeced. wih he approach of Calvo and Reinhar or any oher forms of a cross-secion analysis. Thus, an analysis of ime series of he wo inervenion indicaors has he advanage o filer ou episodes of high inervenion aciviy and episodes of low inervenion aciviy wihin he whole period considered as well as episodes where exchange rae argeing (managed floaing) or exchange rae smoohing (independen floaing) prevailed. Moreover i allows us o idenify changes in he inervenion policy of a counry. In Chaper 5 we will presen some seleced case sudies of counries ha we idenified as managed floaers. 13