The Evaluation Of Exchange Rate Regime Choice In Emerging Markets,from The Perspective Of Economic Vulnerability And Crisis Susceptibility

Since the collapse of the Bretton Woods system in 1973,the system that fixed the price of all other currencies to dollar,there exists floating,fixed and intermediate exchange rate regimes in the international monetary market.The economy’s exchange rate regime choice is closely related to the volatility in its nominal exchange rate and the frequency in the exchange rate adjustment.Therefore,the choice of exchange rate arrangement is one of the most important economic policies for every open economy,as exchange rate is the vital variable in an economy.With the continuous advance in the economic globalization,the emerging market countries occupy a more and more important position in the field of international politics,economy,finance and so forth.Those countries share some common characteristics,such as the rapid economic development but still not conform to the standards of developed countries,the immaturity in the financial markets,and the lack of interrelated regulations in the economic system.The immature financial system must take into account the country’s crisis susceptibility,in which the exchange rate arrangement plays an important roll.Different exchange rate regimes means different levels of the elasticity in the nominal exchange rate and the frequency in its adjustment,and thus causing potential economic vulnerability in different aspects,even leading to increase the risk of the economic crisis.This article will further discuss on the question of exchange rate regime from the perspective of economic vulnerability and crisis susceptibility,and try to find the suitable exchange rate arrangement for the emerging market countries.At the beginning of all discussion,this article made clear of the research object,namely the emerging market countries.Although there are many differences on the existing definition of emerging market countries,emerging market countries have many common features.They all enjoyed a rapid economic development but with a relatively backward economy system.In this article,19 countries with higher esteemed are defined as the major emerging market countries,used to study the economic characteristics,and 51 countries(including the major emerging markets)as the general emerging market countries,used as the research object for empirical analysis.Through summarizing and comparing the average level of some basic macroeconomic variables in developed countries,emerging markets and other developing countries,the article found that the main characteristics of emerging market countries are rapid growth in real output,improved level of economic development and vulnerability to the inflation.In the next chapter,the article made a comparison of different classification methods in exchange rate regimes.Then select the IMF de facto classification as the main classification of exchange rate regimes in the empirical research and RR natural classification and BTY regression classification as a robustness analysis.Based on the observed trend of exchange rate regime choices for emerging market countries and its Markov transition probability matrix,there is a tendency of “hollowing out of the middle” around late 1990’s.And this trend came to an end around 2004 with the proportion of intermediate exchange rate regimes rising in the runup to the global financial crisis.For now,the managed floating regime becomes more and more popular in the emerging market countries;since it has the market-decided exchange rate with high adjust-elasticity at the same time allows some appropriate government intervention in the market.The main part of the article discusses the exchange rate regime’s influence on the economic vulnerability and the crisis realization,revisiting the bipolar prescription for exchange rate regime choice: are the poles of hard pegs and pure floats still safer than the middle? Underlying most crises is some form of vulnerability,and there are different types of vulnerabilities,the financial vulnerability(rapid credit expansion;excessive bank foreign borrowing;foreign currency denominated lending)or the macroeconomic vulnerability(fiscal and current account deficits;real exchange rate overvaluation;over-adjustment in price).The empirical analysis examined the relationship between the exchange rate regime and various financial and macroeconomic vulnerabilities by estimating a proper regression model.The main conclusion is that the foreign borrowing and lending,the trade deficit and the overvaluation would be worse under hard pegs and soft pegs regimes.In brief,less flexible exchange rate regimes may be much more vulnerable to crisis.Based on a limited dependent variable regression model,the research further empirically explore whether the less flexible regimes are more prone to different types of crisis with regard to banking,currency,and sovereign debt crises,as well as general growth collapses.Soft pegs regime is more susceptible to crisis and hard pegs seems to be less crisis-prone.However,that does not mean hard peg is a preferred secure exchange rate arrangement.The growth collapse reflects the whole economy’s environment,and hard pegs are significantly more prone to growth collapses,suggesting that the security of the hard pegs is largely illusory.Combining the analysis on both the economic vulnerability and the crisis susceptibility,the regime of managed floating has no significant difference with free floating.Therefore,the managed float regime is a more suitable exchange rate regime choice for the emerging market countries.In the final section,the article discussed about the smooth transition to the favored exchange rate regimes.First,countries that exited from pegged regime passively tend to prone to a crisis.Adding regime transition dummies in the crisis-prone model to analyze the risk of exiting,the research found that exiting from soft pegs significantly increases the probability of a currency crisis and a growth collapse crisis.Then the article put focus on the timing of exiting,namely the suitable economic environment.Through the comparison between the “secure” exiting(not leading to a crisis)and the “insecure” exiting(leading to a crisis),and estimation on the endogenous model of the exchange rate regime transition for all crisis-free sample,this paper holds that the timing of exit from pegs is when the economy enjoys a sound macroeconomic conditions,a sufficient foreign exchange reserve,and a net cash inflows.In particular,the key to a smooth exiting from pegs is to well control the economic vulnerability.