Federico Sturzenegger

To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth

We study the relationship between exchange rate regimes and economic growth for a sample of 183 countries over the post-Bretton Woods period, using a new de facto classification of regimes based on the actual behavior of the relevant macroeconomic variables. In contrast with previous studies, we find that, for developing countries, less flexible exchange rate regimes are associated with slower growth, as well as with greater output volatility. For industrial countries, regimes do not appear to have any significant impact on growth. The results are robust to endogeneity corrections and a number of alternative specifications borrowed from the growth literature. (JEL F31, F41)

Extreme Inflation: Dynamics and Stabilization

No abstract is available for this paper.

On the Consequences of Sudden Stops

Our analysis shows a number of interesting empirical regularities. First, when we apply a simple definition of sudden stops, we find that they have been a fairly common occurrence at least since the late 1970s. Second, economic performance after a sudden stop can differ dramatically across countries, depending on certain country characteristics. We show that open economies and those that choose a floating exchange rate regime after a crisis recover fairly quickly from the output contraction that usually comes with the sudden stop, whereas countries with liability dollarization recover more slowly. These characteristics relate to how the economies adjust exports and imports during the aftermath of a sudden stop. Open economies that do not show much liability dollarization tend to show higher export growth and less import contraction than highly dollarized economies. The paper is organized as follows. The next section discusses our definition of sudden stops. We then examine the stylized facts associated with sudden stops, including their regional coverage and evolution over time. A subsequent section proceeds to identify the key factors that explain the nature of the aftermath of a sudden stop in capital flows. If sudden stops remain a recurrent feature of emerging market economies in years to come, the issue of how to ensure a quick return of growth in the aftermath of a crisis will require attention. Policy recommendations focused on improving such ex post performance should go hand in hand with traditional prevention measures designed to avoid the crises. We elaborate on these conclusions in the final section.

On the Endogeneity of Exchange Rate Regimes

The literature has identified three main approaches to account for the way exchange rate regimes are chosen: i) the optimal currency area theory; ii) the financial view, which highlights the consequences of international financial integration; and iii) the political view, which stresses the use of exchange rate anchors as credibility enhancers in politically challenged economies. Using de facto and de jure regime classifications, we test the empirical relevance of these approaches separately and jointly. We find overall empirical support for all of them, although the incidence of financial and political aspects varies substantially between industrial and non-industrial economies. Furthermore, we find that the link between de facto regimes and their underlying fundamentals has been surprisingly stable over the years, suggesting that the global trends often highlighted in the literature can be traced back to the evolution of their natural determinants, and that actual policies have been little influenced by the frequent twist and turns in the exchange rate regime debate.

To Float or to Trail: Evidence on the Impact of Exchange Rate Regimes

We study the relationship between exchange rate regimes and economic growth for a sample of 154 countries over the post-Bretton Woods period (1974-1999), using a new de facto classification of regimes based on the actual behavior of the relevant macroeconomic variables. In contrast with previous studies, we find that, for developing countries, less flexible exchange rate regimes are strongly associated with slower growth, as well as with greater output volatility. For industrial countries, on the contrary, regimes do not appear to have any significant impact on growth. The results are robust to endogeneity corrections and a number of alternative specifications borrowed from the growth literature.

On the endogeneity of exchange rate regimes

The literature has identified three main approaches to account for the way exchange rate regimes are chosen: (i) the optimal currency area theory; (ii) the financial view, which highlights the consequences of international financial integration; and (iii) the political view, which stresses the use of exchange rate anchors as credibility enhancers in politically challenged economies. Using de facto and de jure regime classifications, we test the empirical relevance of these approaches separately and jointly. We find overall empirical support for all of them, although the incidence of financial and political aspects varies substantially between industrial and non-industrial economies. Furthermore, we find that the link between de facto regimes and their underlying fundamentals has been surprisingly stable over the years, suggesting that the global trends often highlighted in the literature can be traced back to the evolution of their natural determinants, and that actual policies have been less influenced by the frequent twist and turns in the exchange rate regime debate.

South Africa: Macroeconomic Challenges after a Decade of Success

More than halfway through the decade, the South African economy has done very well. This report asks whether such achievements provide grounds for complacency. In particular it discusses the current account challenge in light of the Accelerated and Shared Growth Initiative for South Africa (ASGI-SA) program. Our assessment is that a cautionary note on the need to reduce external imbalances is needed. We provide policy recommendations to minimize the negative impact of a possible sudden stop of capital inflows. On the consistency of ASGI-SA program, we note that, given South Africas recent employment and productivity performance a large investment program would be required to deliver the desired growth rates. In our view this imposes a large burden on public investment and on the current account itself.

Sovereign Debt in the Americas: New Data and Stylized Facts

In this paper, we introduce the first comprehensive database on sovereign debt systematically compiled to ensure comparability, for all countries in the Americas, and use this new data to highlight the main stylized facts regarding sovereign debt for developing America in the last two decades. We find that debt ratios in developing America are comparable to those in developed countries and have remained stable since the late nineties. By contrast, the composition of debt in the region has changed significantly, shifting from foreign currency external to local currency domestic debt. This onshoring and dedollarization of sovereign debt, contrary to conventional wisdom, has not come at the expense of a shortening of maturities. Furthermore, we find that onshoring is correlated with the level economic development and country size, and with the presence of institutional investors.

Toolkit for the Analysis of Debt Problems

The purpose of this paper is to review a number of tools that may allow an independent observer to assess the likelihood of default, to provide the clues for an evaluation of likely restructuring scenarios and to be able to estimate possible financial and real implications of such an event. In this study we develop seven key measures for analyzing debt problems. The seven measures are mutually reinforcing in that each measure helps to shed lights on aspects of debt problems highlighted by the others. Depending on the nature of the problem some measures may be used alone.

Understanding the welfare implications of currency substitution

Abstract This paper develops a model of endogenous currency substitution where agents decide which purchases will be made with domestic and which with foreign currency. In a representative agent economy allowing for this use of alternative means of payments is welfare enhancing. The result is an application of Ramsey taxation rules, by which currency substitution shifts the burden of the inflation tax towards relatively demand inelastic commodities. When extending the model to the case in which agents have different productivities we show that inflation has strong income distribution effects with high (low) income agents benefitting (losing) when currency substitution is introduced.