Exhange rate policy and growth remarks from the argentine perspective
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Exhange rate policy and growth: remarks from the Argentine perspective. Hernán Lacunza Head of Research Central Bank of Argentina. Outline. Technical Suggestions Remarks from Argentina. Exchange rate regime choice: from the conventional to the bipolar view, and beyond.

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Exhange rate policy and growth remarks from the argentine perspective

Exhange rate policy and growth: remarks from the Argentine perspective

Hernán Lacunza

Head of Research

Central Bank of Argentina


Outline

Outline

  • Technical Suggestions

  • Remarks from Argentina


Technical suggestions

Exchange rate regime choice: from the conventional to the bipolar view, and beyond...

Credibility / commitment

“Developed”

floats

-

+

Floats

Credibility / commitment

. Inflationary performance

. Capital mobility

. Financial dollarization

“Developed”

floats

FIT

-

+

+

-

Floats

. Inflationary performance

. Capital mobility

. Financial dollarization

FIT

+

-

Vanishing middle?

Monetary

autonomy

Real volatility

Pegs

Vanishing middle?

Monetary

autonomy

Real volatility

Bipolar view

Pegs

Bipolar view

-

+

-

+

Type of Shock

Exchange rate regime

Type of Shock

Exchange rate regime

Nominal

Peg

Nominal

Peg

Real

Float

Real

Float

Technical Suggestions

  • Reserves as proxy of FOF in reverse: possible bias in regression analysis (dummies?, systematic accumulation?)

  • Net Positive Intervention (Bofinger and Wollmershäuser, 2002)

  • Exchange rate and exports: direct test and lags effects


Possible bias in the regression analysis

Exchange rate regime choice: from the conventional to the bipolar view, and beyond...

Credibility / commitment

“Developed”

floats

-

+

Floats

Credibility / commitment

. Inflationary performance

. Capital mobility

. Financial dollarization

“Developed”

floats

FIT

-

+

+

-

Floats

. Inflationary performance

. Capital mobility

. Financial dollarization

FIT

+

-

Vanishing middle?

Monetary

autonomy

Real volatility

Pegs

Vanishing middle?

Monetary

autonomy

Real volatility

Bipolar view

Pegs

Bipolar view

-

+

-

+

Type of Shock

Exchange rate regime

Nominal

Peg

Real

Float

Possible Bias in the Regression Analysis

Argentina `90s, Brasil 2006


Systematic reserves accumulation

Exchange rate regime choice: from the conventional to the bipolar view, and beyond...

Credibility / commitment

“Developed”

floats

-

+

Floats

Credibility / commitment

. Inflationary performance

. Capital mobility

. Financial dollarization

“Developed”

floats

FIT

-

+

+

-

Floats

. Inflationary performance

. Capital mobility

. Financial dollarization

FIT

+

-

Vanishing middle?

Monetary

autonomy

Real volatility

Pegs

Vanishing middle?

Monetary

autonomy

Real volatility

Bipolar view

Pegs

Bipolar view

-

+

-

+

Type of Shock

Exchange rate regime

Type of Shock

Exchange rate regime

Nominal

Peg

Nominal

Peg

Real

Float

Real

Float

Systematic Reserves Accumulation


Net positive intervention

(1)

(2)

(2)

(3)

(4)

(3)

(3/1)

(4/2)

Net Positive Intervention

Bofinger and Wollmershäuser (2002)

Levi-Yeyati and Sturzenegger (2007)


Exchange rates and exports

Exchange Rates and Exports

Indirect test:

(1)RERt – RERt-1= b * Intervention + other variables + є

(2)Exports = c * Intervention + other variables + є

Direct test:

(3) Exports = a * RER + other variables + є

Lags: short and long run


Remarks from the argentine perspective

Remarks from the Argentine perspective

International Reserves in US Dollars


Reserves accumulation and fx policy

Reserves accumulation and FX policy

  • Insurance policy

  • Counter-cyclical policy

  • Real exchange rate policy

    • Crisis avoidance

    • Macroeconomic consistence

    • Transitory trend? Fear of floating in reverse, or one step before?

    • FX policy and growth: evidence in search of a theory?


Exhange rate policy and growth remarks from the argentine perspective

Insurance policy


Exhange rate policy and growth remarks from the argentine perspective

Counter-cyclical policy: sources of reserves


Macroeconomic consistence and political economy

Macroeconomic consistence and political economy

  • “Purchasing power illusion”: middle class benefits  high support

  • “Political trap”: elected administrations do not propose changes, regime “explodes” too late

    Argentina: per capita GDP in constant USD (2001)

1980: USD 15,900 pc

1998: USD 9,000 pc

1973: USD 5,000 pc

1989, 2002: USD 2,600 pc


A transitory trend

A transitory trend?


Real exchange rate volatility

Real exchange rate volatility


Fx policy and growth

FX policy and growth

  • Washington Consensus

  • Johnson, Ostry and Subramanian (2006): overvalued exchange rates are associated with lower growth

  • Rajan and Subramanian (2006): share of manufacturing exports

  • Prasad, Rajan and Subramanian: foreign finance doesn’t boost growth (underdeveloped financial system)

  • East-Asian experience: 1960-2000 Subramanian’s yesterday chart: East-Asia 17% average undervaluation; Africa 18% average overvaluation


Evidence in search of a theory

Evidence in search of a theory?

  • Is Diaz Alejandro’s hypothesis opposed to new evidence?

  • Not really: DA’s views applied to the short run: contractionary effects of sharp devaluations, provoked by income redistributions to sectors with lower spending propensity (see Bebczuk and Galindo, 2006)

  • That’s higher propensity of saving, consistent with Levy Yeyati’s hypothesis

  • Contraction in the short-run (lower spending), expansion in the long-run (through higher investment)


Concluding remarks

Concluding remarks

  • Reserves accumulation: self-insurance policy, counter-cyclical policy; crisis avoidance; macroeconomic consistency

  • Transitory or permanent trends? Under uncertainty, it is prudent to manage any euphoria

  • Argentina: in transition to the steady-state

  • Evidence in search of theory or an “old theory” that still holds?

  • Too early to speak of new “regimes”. It may be a temporary, useful policy; the key point is to balance costs and benefits appropriately


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