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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 Convergenceand 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 • 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
Global Economic Divergence Growth of Per Capita GDP for 114 Countries, 1960-1990
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.
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.
Classification of Exchange Rate Regimes 1/ Excludes tightly managed floats