哈佛大学肯尼迪学院教授Frankel的论文之七 NO SINGLE CURRENCY REGIME IS RIGHT

NBER WORKING PAPER SERIES NO SINGLE CURRENCY REGIME IS RIGHT FOR ALL COUNTRIES OR AT ALL TIMES Jeffrey A. Frankel Working Paper 7338 http://www.nber.org/papers/w7338 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 1999 The author would like to thank for comments Barry Eichengreen, Peter Kenen, David Lipton, Larry Summers, and seminar participants at Brookings, Princeton, MIT, Stanford, the University of Michigan, Fletcher School, Federal Reserve Bank of New York, International Monetary Fund and Council on Foreign Relations; and to thank Ron Alquist for research assistance. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. © 1999 by Jeffrey A. Frankel. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. No Single Currency Regime is Right for All Countries or at All Times Jeffrey A. Frankel NBER Working Paper No. 7338 September 1999 JEL No. F3 ABSTRACT This essay considers some prescriptions that are currently popular regarding exchange rate regimes: a general movement toward floating, a general movement toward fixing, or a general movement toward either extreme and away from the middle. The whole spectrum from fixed to floating is covered (including basket pegs, crawling pegs, and bands), with special attention to currency boards and dollarization. One overall theme is that the appropriate exchange rate regime varies depending on the specific circumstances of the country in question (which includes the classic optimum currency area criteria, as well as some newer criteria related to credibility) and depending on the circumstances of the time period in question (which includes the problem of successful exit strategies). Latin American interest rates are seen to be more sensitive to US interest rates when the country has a loose dollar peg than when it has a tight peg. It is also argued that such relevant country characteristics as income correlations and openness can vary over time, and that the optimum currency area criterion is accordingly endogenous. Jeffrey A. Frankel Kennedy School of Government Harvard University 79 JFK St. Cambridge MA 02138 and NBER jeffrey_frankel@harvard.edu No Single Currency Regime is Right for all Countries or at All Times Jeffrey A. Frankel CONTENTS 1. Balancing the Advantages of Fixed vs. Flexible Exchange Rates The Flexibility-continuum of Exchange Rate Regimes The Hypothesis of the Vanishing Intermediate Regime Reminder of the Advantages of Fixed vs. Floating 2. No Single Regime is Right for All Countries: The Optimum Currency Area Definition of Optimum Currency Area The Integration Parameters of the OCA Criteria 3. Corner Solutions Are Right for Some Countries Currency Boards The Alternative of Dollarization The Argentine Dollarization Proposal: Is it a Good Idea? 4. No Single Regime is Right for All Time Exit Strategies 5. The Optimum Currency Area Criterion Evolves over Time The OCA Criterion Might Be Satisfied Ex Post, Even if not Ex Ante A Question for Empirical Investigation: Are Trade Links Positively Associated with Income Links, or Negatively? 6. Summary of Conclusions 1 No Single Currency Regime is Right for all Countries or at All Times Jeffrey A. Frankel The sentence chosen for the title of this lecture should be vacuous. Of course the choice between fixed, floating, or other exchange rate regimes ought to depend on a country’s individual circumstances. But this is not just knocking down a straw man. Many are now talking as if a global move toward fixed exchange rates, on the one hand, or toward greater flexibility, on the other hand, would solve a lot of the problems that the international financial system has suffered in recent years. Among the many lessons drawn from the East Asia crisis, one hears the lament that if only these countries hadn’t been pegged to the dollar, none of this would have happened. The list of countries that have been knocked off a dollar peg of one sort of another, typically at great cost, is growing: Mexico, Thailand, Russia, Brazil... Some would argue that the world is, and should be, drawing the lesson that increased flexibility is needed to forestall speculative attacks that lead to deep financial crises and economic recessions. On the other side are claims that if only countries would adopt truly fixed exchange rates, everything would be fine. After all, none of the crisis-casualty currencies had been literally or formally fixed to the dollar. Enthusiasts point to currency boards that have successfully weathered the storm in Hong Kong and Argentina. Some even go further and suggest full official dollarization. They take encouragement from the euro-eleven’s successful move to a common currency on January 1, 2 1999, a project that has gone more smoothly than most American economists forecast as recently as a few years ago. I want to make a point stronger than the easy one that no single currency regime is a panacea. Rather my overall theme is that no single currency regime is best for all countries, and that even for a given country it may be that no single currency regime is best for all time. This lecture will also consider the claim that countries are increasingly pushed to choose between the polar cases of free float and rigid peg, with the intermediate regimes no longer tenable. 1. Balancing the Advantages of Fixed vs. Flexible Exchange Rates But let’s start with the easy point. Neither pure floating nor currency boards sweep away all the problems that come with modern globalized financial markets. Central to the economists’ creed is that life always involves tradeoffs. Countries have to trade off the advantages of more exchange rate stability against the advantages of more flexibility. Ideally, they would pick the degree of flexibility that optimizes with respect to this tradeoff. Optimization often, though not always, involves an ”interior solution.” The Flexibility-continuum of Exchange Rate Regimes “Fixed vs. floating” is an oversimplified dichotomy. There is in fact a continuum of flexibility, along which it is possible to place most exchange rate arrangements. There are nine, starting with the most rigid arrangement, and becoming increasingly flexible as we go: 3 1) Currency union: Here the currency that circulates domestically is literally the same as that circulating in one or more major neighbors or partners. Examples include Panama and some East Caribbean islands (the dollar) and European Monetary Union (the euro). Dollarization has recently been proposed in several Latin American countries. The motivation is to get the maximum credibility for inflation-resistant monetary policy by adopting the strongest commitment. Even a currency union can be reversed if desired (witness the Czech and Slovak korunas, whose separation was velvety smooth, and the Former Soviet Union, whose separation was considerably rougher). But it is the firmest commitment to a fixed exchange rate possible. 2) Currency board. The current fad is sometimes sold as credibility in a bottle. Examples include Argentina, Hong Kong, and some Eastern European countries. A later section of this paper defines and discusses currency boards at greater length.. 3) “Truly fixed” exchange rate. Members of the francophone West African and Central African currency unions fix to the French franc, while many countries fix to the dollar. 4) Adjustable peg: “Fixed but adjustable” was the description of exchange rate pegs under the Bretton Woods regime. Most countries that declare themselves fixed, in fact periodically undergo realignments, if they do not change regimes altogether.1 1 Obstfeld and Rogoff (1995) report that only six major economies with open capital markets, in addition to a number of very small economies had maintained a fixed exchange rate for five years or more, as of 1995. Klein and Marion (1994) report that the mean duration of pegs among Western Hemisphere countries is about 10 months 4 5) Crawling peg: In high-inflation countries, the peg can be regularly reset in a series of mini-devaluations, as often as weekly. A prominent example is Chile. In one approach, which retains a bit of the nominal-anchor function of an exchange rate target -- the path is pre- announced. The rate of crawl may be set deliberately lower than the rate of forecasted inflation, in an effort by the country to work its way gradually out of the inflation cycle, as in the tablita of southern cone countries in the late 1970s. In another approach, which gives up on fighting inflation and opts instead to live with it, the exchange rate is indexed to the price level, in an attempt to keep the real exchange rate steady. 6) Basket peg: The exchange rate is fixed in terms of a weighted basket of currencies instead of any one major currency, an approach that makes sense for countries with trade patterns that are highly diversified geographically, as many in Asia. In theory, there is little reason why this arrangement cannot be as rigid as an exchange rate fixed to one currency. In practice, most countries that announce a basket peg keep the weights secret, and adjust the weights or the level sufficiently often that the formula cannot be precisely inferred. An exception is the handful of countries that peg to the SDR. 7) Target zone or band: The authorities pledge to intervene when the exchange rate hits pre-announced margins on either side of a central parity. Example: The Exchange Rate Mechanism or ERM, founded in 1979, according to which a number of European countries followed a range of plus-or-minus 2 1/4 percent (still maintained by Denmark). Of course, if the 5 range is sufficiently narrow, a target zone approaches a fixed rate (such as the 1% width that ruled under the Bretton Woods system, and that is still the official definition of a fixed peg); if sufficiently wide it approaches a float (such as the 15% width of the ERM after 1993, still maintained by Greece).2 8) Managed float: Also known as a “dirty float,” it is defined as a readiness to intervene in the foreign exchange market, without defending any particular parity. Most intervention is intended to lean against the wind -- buying the currency when it is rising (or is already high) and selling when it is falling (or is already low). In a stylized version, a managed floater responds to a one percent fluctuation in demand for his currency by accommodating to the extent of varying the supply of the currency by K percent, and letting the rest show up in the price -- the exchange rate. When K is close to 1, the exchange rate is fixed, when it is close to 0 the currency is floating. 9) Free float: The central bank does not intervene in the foreign exchange market, but rather allows private supply and demand to clear on their own. (Even then, there is the question as to what extent monetary policy responds to exchange rate objectives.) The United States is the closest to a pure example of a free float. 2 Target zones come in two varieties -- depending on whether the central parity is fixed in nominal terms (as in the formal model of Krugman, 1991) or is adjusted with inflation and other economic fundamentals (as in the proposal of Williamson, 1985). 6 The Hypothesis of the Vanishing Intermediate Regime Non-ideologues look at recent history and agree that both free floating and rigid fixity have flaws. Nevertheless many increasingly hypothesize that intermediate regimes seem no longer tenable. The currently-fashionable view is that countries are being pushed to choose between the extremes of truly fixed and truly floating.3 For example, Summers (1999): “There is no single answer, but in light of recent experience what is perhaps becoming increasingly clear -- and will probably be increasingly reflected in the advice that the international community offers -- is that in a world of freely flowing capital there is shrinking scope for countries to occupy the middle ground of fixed but adjustable pegs. As we go forward from the events of the past eighteen months, I expect that countries will be increasingly wary about committing themselves to fixed exchange rates, whatever the temptations these may offer in the short run, unless they are also prepared to dedicate policy wholeheartedly to their support and establish extra-ordinary domestic safeguards to keep them in place.” There are understandable reasons for this view. Nevertheless, the generalization is in danger of being overdone. Out of 185 economies, the IMF classifies 47 as independently floating and 45 as following rigid pegs (currency boards or monetary unions, including the franc zone in Africa). This leaves 93 following intermediate regimes. Most of those classified as fixed have in fact had realignments within the last ten years. Even the francophone countries of Africa finally devalued in 1994. Similarly, most of those listed as floating in fact intervene in the foreign exchange market frequently. Only the United States floats so purely that intervention is relatively rare. Most countries still choose something in between rigid fixity and free float, and 3 The original references on the vanishing intermediate regime are Eichengreen (1994, 1998). In the context of the European ERM, the crisis of 1992 and band-widening of 1993 suggested to some that a gradual transition to EMU, where the width of the target zone was narrowed in steps, might not be the best way to proceed after all (Crockett, 1994). Obstfeld and Rogoff (1995) concluded, “.A careful examination of the genesis of speculative attacks suggests that even broad-band systems in the current EMS style pose difficulties, and that there is little, if any, comfortable middle ground between floating rates and the adoption by countries of a common currency.” The lesson that “the best way to cross a chasm is in a single jump” was seemingly borne out by the successful leap from wide bands to EMU in 1998-99. 7 perhaps with good reason.4 Again: close to the center of the economists’ creed is that interior solutions are more likely -- for the interesting questions -- than corner solutions. Whence the hypothesis of the disappearing intermediate regime (or the “missing middle”), to begin with? At first glance, it appears to be a corollary to the principle of the impossible trinity. That principle says that a country must give up one of three goals: exchange rate stability, monetary independence, and financial market integration. It cannot have all three simultaneously. If one adds the observation that financial markets are steadily becoming more and more integrated internationally, that forces the choice down to giving up on exchange rate stability or giving up on monetary independence. But this is not the same thing as saying one cannot give up on both, that one cannot have half-stability and half-independence. There is nothing in existing theory, for example, that prevents a country from pursuing a managed float in which half of every fluctuation in demand for its currency is accommodated by intervention and half is allowed to be reflected in the exchange rate. Figure 1 is a simple schematic illustration of the impossible trinity. Each of the three sides has an attraction -- the allures of monetary independence, exchange rate stability, and full financial integration. One can attain any pair of attributes -- the first two at the apex marked “capital controls”, the second two at the vertex marked “monetary and financial union”, or the other two at the vertex marked “pure float.” But one cannot be on all three sides simultaneously. The general trend of financial integration has pushed most countries toward the lower part of the graph. If one is at the bottom leg of the triangle, the choice is narrowed down to a simple 4 The intermediate regimes in the IMF classification scheme break down as follows: 25 pegged to a single currency, 13 pegged to a composite, 6 crawling pegs, 12 horizontal bands, 10 crawling bands, and 26 managed floats. The data pertain to January 1, 1999. The source is International Financial Statistics, April 1999. 8 decision regarding the degree of exchange rate flexibility. But even under perfect capital mobility there is nothing to prevent the country from choosing an intermediate solution in between floating and monetary union. Recent history makes it understandable that some would flee the soft middle ground of regimes 4-7 and seek the bedrock of extremes 1-2 or 9. Monetary union and pure floating are the two regimes that cannot be subjected to speculative attack. Most of the intermediate regimes have been tried and failed, often spectacularly so. Contrary to claims that Mexico, Thailand, Indonesia, Korea, Russia or Brazil were formally pegged to the dollar when their recent crises hit, they actually were following varieties of bands, baskets, and crawling pegs. Perhaps when international investors are lacking in confidence and risk-tolerance -- the conditions that have characterized emerging markets during 1997-99, for example -- governments can reclaim confidence only by proclaiming policies that are so simple and so transparent that investors can verify instantly that the government is in fact doing what it claims it is doing. If a central bank, for example, announces a band around a crawling basket peg,5 it takes a surprisingly large number of daily observations for a market participant to solve the statistical problem, either explicitly or implicitly, of estimating the parameters (the weights in the basket, the rate of the crawl, and the width of the band) and testing the hypothesis that the central bank is abiding by its announced regime. This is particularly true if the central bank does not announce the weights in the basket (as is usually the case) or other parameters. By contrast, market participants can verify the announcement of a simple dollar peg instantly. 5 Israel and Chile, for example, have in the 1990s had crawling bands around basket pegs (Williamson, 1996). 9 An alternative interpretation is that the search for a single regime that will eliminate currency speculation as an issue, is a search that cannot be successful (short of capital restrictions). Large swings and speculative bubbles intrude on the nirvana of pure floating.6 Even the central bankers’ oblivion of currency union does not offer an end to earthly sorrows, as political upheavals intrude from time to time. The rejection of the middle ground is then explained simply as a rejection of where most countries have been, with no reasonable expectation that the dreamed-of sanctuaries, monetary union or free floating, will in fact be any better. The grass is always greener on the other side of the parity. Many countries are fated to switch back and forth among various regimes, in an unending markov process. If this is right, the only recommendation one can give most central bankers in vulnerable countries (except those like Panama, Luxembourg or Hong Kong whose country characteristics suit them for a corner solution) is to stay on their toes. A blanket recommendation to avoid the middle regimes would not be appropriate. Reminder of the Advantages of Fixed vs. Floating This is not the place to