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Economic Convergence and Exchange Rate Regimes

Economic Convergence and Exchange Rate Regimes. Mehmet Yörükoğlu Central Bank of Republic of Turkey. Emerging Markets. All Countries Excluding Emerging Markets. Question:. Why do emerging market economies prefer floating exchange regime more than others do?. Outline.

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Economic Convergence and Exchange Rate Regimes

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  1. Economic Convergenceand Exchange Rate Regimes Mehmet Yörükoğlu Central Bank of Republic of Turkey

  2. Emerging Markets All Countries Excluding Emerging Markets

  3. Question: • Why do emerging market economies prefer floating exchange regime more than others do?

  4. Outline • Strong preference of emerging economies for flexible exchange rate regime. • History and dynamics of convergence. • Balassa-Samuelson effect and real exchange rate appreciation during convergence. • Discussion about the problems about fixing (even managing) the exchange rate during the convergence process. • Other possible explanations for the flexibility preference. • Conclusions

  5. Global Economic Divergence Growth of Per Capita GDP for 114 Countries, 1960-1990

  6. Labor Productivity and CPI Decomposition in Croatia

  7. Labor Productivity and CPI Decomposition in Slovakia

  8. Labor Productivity and CPI Decomposition in Czekh Republic

  9. Labor Productivity and CPI Decomposition in Hungary

  10. Labor Productivity and CPI Decomposition in Poland

  11. Labor Productivity and CPI Decomposition in Euro Area

  12. Other Possible Explanations • Fixed exchange rate as a nominal anchor for monetary policy may not be that relevant for emerging economies. • Moreover, EME may prefer flexible exchange rate regime in order to fight against inflation more aggresively • Fixed exchange rate regime as a prevention for competitive depreciation may less of an issue now for emerging economies. • Advances in IT may have reduced the potential volatility under flexible exhange rate regime.

  13. Conclusions • Emerging market economies experience significant real exchange rate appreciation during the convergence process. • In an environment where real exchange rate is expected to have a positive trend maintaining a fixed exchange rate regime may be very difficult and costly. • This may be why more and more emerging market economies prefer a flexible echange rate regime.

  14. Classification of Exchange Rate Regimes 1/ Excludes tightly managed floats

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