Comments on “Re-examining exchange rate

regimes in Asia after the global financial crisis”

by Ila Patnaik, Ajay Shah, and Anmol SethySergio Schmukler

5nd Research Meeting of the NIPFP-DEA ProgramNew Delhi

September 16 and 17, 2009

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Comments

Very nice paper

Very interesting topic

Nice set of results

Motivates much thinking

Results very appealing, intuitive, and suggestive

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Comments

Boost interpretation and framework for general audience

General commentsBeyond Asia: more general phenomenon?

What has changed this time?

The “new new” on exchange rate regimes

Some specific comments

4

Comments: Beyond Asia, and FX

Is there anything of particular interest that the Asian experience teaches us?

Move to flexibility seems to be across the board

More secular trend, across countries and asset classes

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Exchange rate fluctuation during crisis

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Japan Macao Bolivia Panama EritreaSaudi Arabia

Bahrain, Kingdom ofSt. Kitts and Nevis

GrenadaBahamas, The

Venezuela, Rep. Bol.SamoaPeru

LesothoSingapore BotswanaAngola

DenmarkSan MarinoBulgariaTogo MaliGabon Chad

Comoros AustraliaChile Latvia

Costa RicaCroatia KuwaitIndia Nepal Korea Brazil

Uruguay ParaguayKazakhstan

Russia Belarus

Nominal Exhange Rate Change vis-a-vis U.S. Dollar (Depreciation = Posit ive Value)

Aug. 08 to Jul. 09 (End of Period)

India

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Exchange rate fluctuation during bust

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Japan

Hong KongPanama Eritrea

Saudi ArabiaBahrain, Kingdom ofSt. Kitts and Nevis

GrenadaBahamas, The

Venezuela, Rep. Bol. China,P.R.: Mainland Trinidad and Tobago

SwitzerlandMyanmar Philippines Singapore Morocco Denmark

San Marino Burkina FasoNiger

Guinea-Bissau

Congo, Republic of

CameroonBulgaria LithuaniaChile

Tunisia Croatia Kenya CanadaArgentina Namibia Ghana

New ZealandKazakhstanParaguay ColombiaMexico Hungary

Nominal Exhange Rate Change vis-a-vis U.S. Dollar (Depreciation = Posit ive Value)

Aug. 08 to Mar. 09 (End of Period)

India

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Exchange rate fluctuation during recovery

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

SwazilandSouth Africa New Zealand

SwedenCzech Republic United Kingdom

Norway RussiaEuro Area

Bosnia & HerzegovinaBurkina Faso

NigerGuinea

-BissauCongo, Republic of

CameroonMacedonia, FYR

LatviaMorocco

SwitzerlandThailand MalaysiaNepal Japan

GeorgiaAzerbaijan, Rep. of

Hong KongPanama Eritrea

Saudi ArabiaBahrain, Kingdom ofSt. Kitts and Nevis

GrenadaBahamas, The

Venezuela, Rep. Bol.Bolivia

KazakhstanDominican Republic

Costa Rica Iran, I.R. ofGhana

Nominal Exhange Rate Change vis-a-vis U.S. Dollar (Depreciat ion = Posit ive Value) Feb. 09 to Jul. 09 (End of Period)

India

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All asset prices co-move, not just FX

S&P

Latin AmericaEastern Europe

South Asia

30

50

70

90

110

130

150

170

190

210

230

Jan-06

Mar-06

May-06

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Stock Prices in Emerging M arkets and the U.S. Index number - Jan 06=100

East Asia

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Comments: What has changed?

What is new about this particular crisis, and period?

Many changes on the fundamental sideLearning from the past on exchange rate regimes and exchange rate behavior

Countries in better fiscal, monetary, and financial stance

Countries wanted to regain use of monetary policy

External positions have improved (assets and liabilities)

Reserves have piled up

Inflation remained tamed

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Monetary policy rates, developed countries

0

1

2

3

4

5

6

Jan-05

Mar-05

May-05

Jul-05

Sep-05

Nov-05

Jan-06

Mar-06

May-06

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

M onetary Policy Ratesin %

UKUS

Euro Area

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Monetary policy rates, Latin America

0

2

4

6

8

10

12

14

16

18

Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09

Monetary Policy Rates in LAC Countries

Brazil

Chile

Colombia

Mexico

Peru

Argentina

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Fiscal policy

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5Italy

France

UK

Germany

Canada

US

Australia

Spain Japan Korea

Estimated Cost of Fiscal Discretionary M easures in 2009as % of GDP

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Fiscal policy

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5Brazil India

Indonesia Argentina

Mexico

China

S, Arabia

Russia

Estimated Cost of Fiscal Discretionary M easures in 2009as % of GDP

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InflationInflation in selected regions

annual variation

4%

5%

6%

7%

8%

9%

10%

11%

12%

LAC ECA East Asia and Pacif ic South Asia

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Inflation

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09

Consumer Price Inflation in LACannual variations, in %

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Current account balanceCurrent account balance in selected regions

as % of GDP

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

LAC ECA East Asia and Pacif ic South Asia

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Reserves

International Reserves in selected regionsas % of GDP

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

LAC ECA East Asia and Pacific South Asia

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Banking crisis

Argentina 1980 Argentina 1995

Brazil 1985 Brazil 1995

Chile 1980 Colombia 1998

Colombia 1982 Ecuador 1996, 1998

Ecuador 1980 Honduras 1999

Mexico 1981 Jamaica 1996

Peru 1983 Nicaragua 2000

Uruguay 1981 Paraguay 1995

Peru 1999

Banking Crises in LAC Countries1980-1985 1995-2000 2008-2009

The table shows the start year of banking crises based on Laeven and Valencia

(2008) and Reihart and Rogoff (2008).

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Comments: What has changed?

This time IS different!

Lessons from the past on overvaluation and crisesOvervaluation bad

Crises as opportunities to adjust

Don’t lag behind

Crisis in the center, able to use some flexibilityUnique event?

Difference between global and idiosyncratic shocks

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Comments: New new on ERRs

Bipolar view: boom and bustFull flexibility or full fixing after Asia

Full flexibility difficult

Need anchor

Needs institutions

Much pressure

Full fixing difficult

Mismatches: credit risk

Price flexibility hard to achieve

No transfers, no capacity to adjust to shocks

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Comments: New new on ERRs

How would intermediate regimes look like?Discretion

Verifiability

Lack of anchor

Rely on (often lacking) credibility

Role of the U.S. dollar versus other currencies

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Specific comments

Do periods have meaning?

Changes in regime mean economically different regimes?

Provide reader with meaning of “flexibility,” beyond R2

Pegging to major currency vs. “pegging” to within Asia

Common shocks might be moving all Asian currencies

Why weekly instead of daily, given crisis focus?

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Specific comments

Does volatility play a role in identifying exchange rate regimes?

Seems so

Some results in paper but not very transparent

Not obvious that takes care of increases in volatility

Permanent or temporary shift?Do results mainly capture crisis management?

Does full flexibility in Korea have meaning?

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Thank you!