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Parametric and Non-Parametric Approaches to Exits from Fixed Exchange Rate Regimes

Author

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  • Ahmet Atil Asici

    (Graduate Institute of International Studies, Geneva Switzerland)

Abstract
When the Bretton-Woods system collapsed in the mid 1970s, almost all countries were pursuing one form of a pegged regime or another. Increasing trade and financial integration forced many countries to move to more flexible regimes. Some countries exited without experiencing major disruption to their economic activity, but the majority did so in the midst of a crisis. At the same period, generally for stabilization purposes, many developing countries were advised to pursue pegged regimes, in which the exchange rate was used as a nominal anchor to enhance the credibility of monetary policy. Moving to more flexible regimes once a certain level of economic stability was reached was the ultimate objective for many programs. Again, some countries managed this transition quite successfully, but the majority faced speculative attacks along the way. The aim of this study is to determine the conditions under which exits from pegged to flexible regimes are managed in an orderly manner. To do so, this paper proposes a way to merge two methodologies – standard regression analysis and CART analysis on a dataset of 128 countries from 1975 to 2002. The application of CART methodology to economic phenomenon like exiting is quite new. The analysis shows that higher output growth, higher private credit and an overvalued real exchange rate a year before exit, among others, increase the likelihood of exiting in a disorderly way. Following the exit both output and credit collapse and the exchange rate depreciates considerably. The illmanaged financial liberalization and macroeconomic stabilization programs seem to lay the seeds of instability that take the form of boom-bust cycles.

Suggested Citation

  • Ahmet Atil Asici, 2008. "Parametric and Non-Parametric Approaches to Exits from Fixed Exchange Rate Regimes," Working Papers 401, Economic Research Forum, revised 03 Jan 2008.
    • Handle: RePEc:erg:wpaper:401
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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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