Exhange rate policy and growth: remarks from the Argentine perspective

Hernán LacunzaHead of ResearchCentral Bank of Argentina

Outline

Technical Suggestions

Remarks from Argentina

Technical Suggestions

1. Reserves as proxy of FOF in reverse:

possible bias in regression analysis

(dummies?, systematic accumulation?)

2. Net Positive Intervention (Bofinger and

Wollmershäuser, 2002)

3. Exchange rate and exports: direct test

and lags effects

Possible Bias in the Regression Analysis

      

      

            

            

      

      

Increase Decrease

To Smooth Currency

Appreciation

(1) Successful Fear of Floating in Reverse

(2) Failure in Implementing

Fear of Floating in Reverse

Others

(3) Other Reasons

(Valuation Effects, Smooth Volatility,

Adequacy Criteria, etc.)

(4) Other Reasons

(Valuation Effects, Smooth Volatility,

Currency Crisis, etc.)

Po

licy

Go

als

International Reserves

Argentina `90s, Brasil 2006

Systematic Reserves Accumulation

      

      

            

            

      

      

Exchange rate regime Frequency Percentage

Fixed rate 78 26%

Intermediate regime 20 7%

Managed floating 108 35%

Independent floating 99 32%

Total 305 100%

Net Positive Intervention

Bofinger and Wollmershäuser (2002) Levi-Yeyati and Sturzenegger (2007)

n

i itit

it

itit

itabs

MExR

MExR

S0 11

11

22

(1) (2)

n

i nt

ititabs

R

RRS

0 1

12

(3) (4)

(3/1) (4/2)

1

11

abst

efftfloat

t S

SI 2

22

abst

efftfloat

t SS

I

n

i itit

it

itit

iteff

MExR

MExR

S1 11

11

22

n

i

t

t

ititt

e

MB

RR

nMR

0

1

1

11

(2)

(3)

n

i

t

t

ititt

e

MB

RR

nMR

0

1

1

11

n

i nt

ititeff

R

RRS

0 1

12

Exchange Rates and Exports

Indirect test:

(1) RERt – RERt-1= b * Intervention + other variables + є

(2) Exports = c * Intervention + other variables + є

Direct test:

(3) Exports = a * RER + other variables + є

Lags: short and long run

Remarks from the Argentine perspective

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1994M1 1995M1 1996M1 1997M1 1998M1 1999M1 2000M1 2001M1 2002M1 2003M1 2004M1 2005M1 2006M1 2007M1

International Reserves in US Dollars

Reserves accumulation and FX policy

1. Insurance policy

2. Counter-cyclical policy

3. Real exchange rate policy Crisis avoidance Macroeconomic consistence Transitory trend? Fear of floating in

reverse, or one step before? FX policy and growth: evidence in search

of a theory?

Experiences % change of reserves

Argentina-94 -40.95Argentina-99 -14.17Argentina-01 -48.61Chile-98 -22.30Colombia-98 -18.29Czech Republic-97 -33.44Ecuador-99 -72.90Germany-93 -43.03Indonesia-97 -24.48Japan-97 -10.68Korea-97 -41.14Mexico-94 -85.16Peru-97 -6.58Philippines-97 -31.54Portugal-92 -40.63Spain-92 -44.12Sweden-92 -35.52Thailand-96 -37.22Turkey-94 -53.06Turkey-98 -10.94Turkey-01 -34.89Source: Calvo, Izquierdo and Mejía (2004)

Insurance policy

Counter-cyclical policy: sources of reserves

-12,000

-8,000

-4,000

0

4,000

8,000

12,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Mill

ion

of U

$S

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

Mill

ion

of U

$S

Annual Change of Reserves Capital Account (right hand axis)

Current Account (right hand axis)

Macroeconomic consistence and political economy “Purchasing power illusion”: middle class benefits high support

“Political trap”: elected administrations do not propose changes, regime “explodes” too late

Argentina: per capita GDP in constant USD (2001)

1980: USD 15,900 pc

1998: USD 9,000 pc

1973: USD 5,000 pc

1989, 2002: USD 2,600 pc-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

A transitory trend?

Index of Commodity Prices

Historical Avg.

88,2

40

50

60

70

80

90

100

110

120

130

140

Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07

Dec̀ 95=100

Precios de Exportación

60

70

80

90

100

110

120

130

I-86 II-88 III-90 IV-92 I-95 II-97 III-99 IV-01 I-04 II-06

1993=100

Fuente: INDEC

Real exchange rate volatility

Argentina: real exchange rate and business cycles

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

(200

1=1)

Real exchange rate (USD) Cyclical expansion

FX policy and growth

Washington Consensus

Johnson, Ostry and Subramanian (2006): overvalued exchange rates are associated with lower growth

Rajan and Subramanian (2006): share of manufacturing exports

Prasad, Rajan and Subramanian: foreign finance doesn’t boost growth (underdeveloped financial system)

East-Asian experience: 1960-2000 Subramanian’s yesterday chart: East-Asia 17% average undervaluation; Africa 18% average overvaluation

Evidence in search of a theory?

Is Diaz Alejandro’s hypothesis opposed to new evidence?

Not really: DA’s views applied to the short run: contractionary effects of sharp devaluations, provoked by income redistributions to sectors with lower spending propensity (see Bebczuk and Galindo, 2006)

That’s higher propensity of saving, consistent with Levy Yeyati’s hypothesis

Contraction in the short-run (lower spending), expansion in the long-run (through higher investment)

Concluding remarks

Reserves accumulation: self-insurance policy, counter-cyclical policy; crisis avoidance; macroeconomic consistency

Transitory or permanent trends? Under uncertainty, it is prudent to manage any euphoria

Argentina: in transition to the steady-state Evidence in search of theory or an “old theory” that still

holds? Too early to speak of new “regimes”. It may be a

temporary, useful policy; the key point is to balance costs and benefits appropriately