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

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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...

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


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


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


(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

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

International Reserves in US Dollars


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?


Insurance policy


Counter-cyclical policy: sources of reserves


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?


Real exchange rate volatility


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?

  • 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

  • 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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