Systematic Managed Floating

Abstract

A majority of countries neither freely float their currencies nor firmly peg. But most of the remainder in practice also don't obey such well-defined intermediate exchange rate regimes as target zones. This paper proposes to define an intermediate regime, to be called "systematic managed floating," as an arrangement where the central bank regularly responds to changes in total exchange market pressure by allowing some fraction to be reflected as a change in the exchange rate and the remaining fraction to be absorbed as a change in foreign exchange reserves. An operational criterion for judging systematic managed floaters is a high correlation between exchange rate changes and reserve changes. The paper rejects the view that exchange rate regimes make no difference. In regressions to test effects on real exchange rates, we find that positive external shocks tend to cause real appreciation for most systematic managed-floaters; more strongly so for pure floaters; and not at all for most firm peggers. Two measures of exogenous external shocks are used: (i) for commodity-exporters, a country-specific index of global prices of the export commodities and (ii) for other Asian emerging market economies, the VIX.

Monetary Policy Spillovers under Intermediate Exchange Rate Regimes

“…The argument is that middle ground exchange rate regimes are unstable and crisis prone, therefore exchange rate policy should converge to either fixed or floating (Frankel et al, 2000[25]). However, empirically this hypothesis has been continuously rejected, as middle-ground exchange rate policies are alive and well (Fischer, 2001[20], Masson, 2001 [47], Williamson (2002) [60], Frankel, 2019 [22], Frankel et al (2019) [24]). Most of the world follows an intermediate exchange rate regime.…”

“…To circumvent this 7 Variants of this methodology have been recently implemented in McCauley and Chan (2014) [48], Ito and Kawai (2016) [40] and Ito and McCauley (2019) [41] to study crosscountry patterns in trade invoicing currencies, global imbalances and the composition of central bank foreign reserves. Frankel et al (2019) [24] consider continuous de facto exchange rate regimes to study their effects on economic growth.…”

“…The specification focuses on short-run associations, while Shambaugh (2004) [57] highlight the possibility of long-run adjustment in the policy rate which might depend on the Trilemma configuration. That is, even if policy rates across countries respond immediately to one another, it's also possible for country i's interest rate to be increasingly cointegrated with the base country's interest rate as peg intensity rises -so interest rate adjustment occurs over both the short-run and over a longer period of time 22 . To test for this, I extend Equation 5 to include two error-correcting terms: A cointegrating vector between country i's interest rate and the base country (U.S. and E.U.…”

“…Klein and Shambaugh (2015) [45] On the other hand, Aizenman et al (2010 [2], (2013 [4]) and Ito and Kawai (2014) [39] investigate the Trilemma middle-ground under a continuous policy setting, but rather than focusing on monetary policy spillovers, they focus on macroeconomic implications and determinants of such middle-ground policy configurations (Aizenman and Ito, 2014[6], Frankel et al, 2019 [24] and Obstfeld et al, 2019 [53]).…”

The Dynamic Impact of FX Interventions on Financial Markets

“…So, the exact intervention days are largely exogenous at the daily frequency. Of course, interventions may be more or less probable, as argued by Frankel (2019), but they are not anticipated with any certainty. As interventions often occur in sequences, this argument holds in particular for the first day, or the first intervention during a day, but less so for subsequent interventions.…”