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Surprising Similarities: Recent Monetary Regimes of Small Economies

Surprising Similarities: Recent Monetary Regimes of Small Economies. Andrew K. Rose Berkeley-Haas, CEPR and NBER. Key Question. Global Financial Crisis (GFC) spread globally, especially via capital (and trade) flows How did outcomes for small economies vary by monetary regime?

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Surprising Similarities: Recent Monetary Regimes of Small Economies

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  1. Surprising Similarities:Recent Monetary Regimes of Small Economies Andrew K. Rose Berkeley-Haas, CEPR and NBER

  2. Key Question • Global Financial Crisis (GFC) spread globally, especially via capital (and trade) flows • How did outcomes for small economies vary by monetary regime? • Did one monetary regime provide more insulation from GFC spillovers? Rose: Monetary Regime Similarities

  3. Focus • Recent Period • Panel of data, mostly focusing on period of and since GFC (2007-2012) • Small Countries • Who’s Small? The non-large (>170 countries) • Exclude the IMF Systemic-5 • China, EMU, Japan, UK, USA Rose: Monetary Regime Similarities

  4. Key Finding 1 • Monetary regimes of small economies have been stable recently • Unexpected because: • Historical counter-cyclicality • Size of GFC and Great Recession • Why the Stability? What’s New? • Countries that Float with Inflation Targeting • (Hard Fixes always around) Rose: Monetary Regime Similarities

  5. Key Finding 2 • Remarkably Similar Recent Outcomes for Hard Fixers and Inflation Targeters • Business Cycles, Inflation, Capital Flows, Responses to Capital Flows … • Implausible or Boring? • Surprising since these appear to be two very different monetary regimes • Banal for literature (since Baxter-Stockman), since regimes matter for little except exchange rate Rose: Monetary Regime Similarities

  6. Data Set • Annual Panel • Standard sources (WDI, Polity IV, EFW, IFS, BIS) Rose: Monetary Regime Similarities

  7. Measuring the Monetary Regime • Issue: de jure or de facto? • Issue: exchange rate or monetary regime? • Issue: want recent span • Solution: de facto monetary regimes from IMF Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) • Potential problem: short span (2001-2012) Rose: Monetary Regime Similarities

  8. de facto Alternatives • Levy-Yeyati and Sturzenegger • Exchange rate regimes through 2004 • Reinhart and Rogoff • Exchange rate regimes through 2010 • Stone and Bhundia • Monetary Regimes 1990-2005 Rose: Monetary Regime Similarities

  9. Monetary Regimes of the Small • AREAER: country-years split into 44 cells • Depends on • Degree of exchange rate rigidity • orientation of fix (if any) • objective of float (inflation, money aggregate, ‘other’) • My focus: two extreme monetary regimes • Floating with Inflation Target • AREAER criteria deliver similar results to Mishkin’s 5 • Hard Fix Rose: Monetary Regime Similarities

  10. 2006 Monetary Regimes for Small • 26 float with inflation target • 1 left by 2012 (Slovakia for EMU) • 83 hard fix • No separate legal tender; currency board; conventional peg • (Conv. Peg: Bahamas, Denmark, Latvia, Saudi Arabia, Benin, Namibia …) • (Insensitive to inclusion: appendix) • 23 left by 2012 Rose: Monetary Regime Similarities

  11. Inflation Targeters Continuously 2006-12 Rose: Monetary Regime Similarities

  12. Inflation Targeter in 2006,Exited by 2012 Rose: Monetary Regime Similarities

  13. Hard FixersContinuously 2006-12 Rose: Monetary Regime Similarities

  14. Hard Fixers in 2006,Exited by 2012 Rose: Monetary Regime Similarities

  15. Hard Fixers in 2006 and 2012but not continuously in between Rose: Monetary Regime Similarities

  16. “Sloppy Center” Remaining • Soft fixes (stabilized, crawling peg/band, pegged exchange rate within horizontal bounds); • Floating with a monetary target (variants including crawl-like, managed, or free floats) • Floating ‘Other’ • 32 in 2006-2012 (17 with AREAER switches) • 30 switched out by 2012 Rose: Monetary Regime Similarities

  17. Sloppy CenterContinuously 2006-12(* indicates switched IMF de facto Monetary regime) Rose: Monetary Regime Similarities

  18. Sloppy Center in 2006, Exited by 2012 Rose: Monetary Regime Similarities

  19. Sloppy Center in 2006 and 2012 but not continuously in between Rose: Monetary Regime Similarities

  20. Durability of Monetary RegimesSmall Economies Rose: Monetary Regime Similarities

  21. Sloppy Center: Turnover is Big and (Counter-) Cyclic Rose: Monetary Regime Similarities

  22. Representative? • Since 1970, regime turnover has been high and (counter-) cyclic Rose: Monetary Regime Similarities

  23. Durability of Monetary Regimes , Small Economies: Historical Volatility(excludes Germany, Japan, UK, USA) Rose: Monetary Regime Similarities

  24. Historical Cyclicality of Monetary/Exchange Rate Regimes Rose: Monetary Regime Similarities

  25. Conclude: Stability from Inflation Targeting Regimes • New • Significant • Acyclic Rose: Monetary Regime Similarities

  26. Monetary Regimes by the Numbers: Counting Countries Rose: Monetary Regime Similarities

  27. Monetary Regimes by the Numbers: Sizing Up the Economies Rose: Monetary Regime Similarities

  28. Tangent: Determinants of Monetary Regimes • Remarkably little known • Recent surveys in Klein and Shambaugh (2010), Rose (2011) • Literature: focus on (sluggish) levels • Here: use Stone-Bhundia regimes (through 2005, pre-dates GFC) • Size, income, institutions, openness Rose: Monetary Regime Similarities

  29. Characteristics Across Monetary Regimes: Univariate Evidence Rose: Monetary Regime Similarities

  30. Quantile Plots • Compare (univariate) distribution of key characteristics across regimes • Quantiles for different regimes plotted on different axes • Similar distributions: data plotted along diagonal Rose: Monetary Regime Similarities

  31. Rose: Monetary Regime Similarities

  32. Determinants of Monetary Regimes : Multivariate Evidence Rose: Monetary Regime Similarities

  33. Hard to extend Univariate Success • Multinomial Logit compares determinants of three regimes Rose: Monetary Regime Similarities

  34. Determinants of Monetary Regimes : Coefficient Estimates Rose: Monetary Regime Similarities

  35. Limited Success, No Surprises • Small countries: more likely to (hard-) fix, less likely to target inflation • Democracies: less likely to fix, more likely to target inflation • Marginal effects of income • No effect of real or financial openness • Fit consistently poor! • Always hard to determine monetary regime Rose: Monetary Regime Similarities

  36. Consequences of Monetary Regime • Initially take regime choice as exogenous/random • Not so bad in practice • Will verify with IV/matching: results insensitive Rose: Monetary Regime Similarities

  37. Compare Three Regimes • Inflation Targeting Floats • Ex: Brazil, Korea, Mexico, Canada • Hard Fixes • 60 durable (Saudi Arabia, Hong Kong, Denmark) • Sloppy Center • India, Russia, Iran Rose: Monetary Regime Similarities

  38. Compare long-lived, durable regimes (IT/HF) • With sloppy center • With each other • Throughout use period since2006 Rose: Monetary Regime Similarities

  39. Quantile Plots: Outcomes for Hard Fixers Similar to Inflation Targeters • Unexpected a priori: two dis-similar monetary regimes • But univariate distributions surprisingly alike, much overlap Rose: Monetary Regime Similarities

  40. Rose: Monetary Regime Similarities

  41. Rose: Monetary Regime Similarities

  42. Rose: Monetary Regime Similarities

  43. Ditto Statistical Analysis • Some differences between hard fixers and inflation targeters … but more similarities • Not power: effects of HF/IT on inflation similar, significantly different from SC Rose: Monetary Regime Similarities

  44. Technical Stuff • Panel LS on dummies for HF/IT • Omitted: sloppy center • Fixed time, random country effects (can’t do fixed) • Regressands • Output consequences • Capital flows • Adjustment mechanisms • Current account, capital controls, reserves, money, fiscal policy, real exchange rate appreciation, inflation Rose: Monetary Regime Similarities

  45. Effects of Monetary Regimes 2007-12: Regression Evidence on Output Rose: Monetary Regime Similarities

  46. Effects of Monetary Regimes 2007-12: Regression Evidence on Capital Flows Rose: Monetary Regime Similarities

  47. Effects of Monetary Regimes 2007-12: Regression Evidence, Adjustment 1 Rose: Monetary Regime Similarities

  48. Effects of Monetary Regimes 2007-12: Regression Evidence, Adjustment 2 Rose: Monetary Regime Similarities

  49. Effects of Monetary Regimes 2007-12: Regression Evidence, Prices Rose: Monetary Regime Similarities

  50. Sensitive to Estimation Technique? • Use IV (size and polity: determination model) • Business cycle, investment freedom results disappear • Similar results for Inflation (*), stock prices • Also use nearest-neighbor matching • Match on government spending (% GDP), unemployment rate • Similar results, especially for inflation Rose: Monetary Regime Similarities

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