Real and Nominal Effects of Exchange Rate Regimes

Abstract

This dissertation explores some of the macroeconomic effects of exchange rate regimes and the role of real exchange rate on capital accumulation and growth. The first essay analyzes the factors that promotes episodes of accelerated capital accumulation that last seven years or longer. After identifying 189 such episodes, I rely on econometric analysis to explore: (i) the conditions that increase the likelihood of an episode taking place, (ii) the presence of structural change during episodes, and (iii) the characteristics that distinguish episodes that are sustained beyond the final year from those that are not. Turning points in investment tend to be preceded by fast growth, stable and undervalued currencies, low inflation, and low capital inflows, especially on the portfolio account. During the episodes, economies experience a shift in their economic structure, from agriculture toward the manufacturing sector. Sustained episodes seems to be related to trade openness, low incidence of macroeconomic crises, a relatively closed capital account, and low dependence of natural resources, but these results are not very robust. The second essay explores the relation between exchange rate regimes and real exchange rate misalignments in an unbalanced panel of 100 countries, spanning the period 1979-2010. The propensities to adopt a particular exchange rate regime are estimated using different exchange rate regime determinants, and the results are used to create a control group to compare with the countries that adopt a peg. The comparison of countries that use pegs with countries that have similar characteristics, but use more flexible arrangements, suggest that pegs are associated with more overvaluation. The results are robust to different exchange rate regime classifications, misalignment indexes, and matching estimators. The third and final essay discusses the effects of Inflation Targeting in LatinAmerican countries during the period 2000-2015. Some authors have argued that there is a flaw in the way in which the system has been conducted in the region. In good times, the Central Banks are reluctant to cut interest rates, but in bad times they are willing to raise interest rates very aggressively, adding a procyclical bias to monetary and exchange rate policies. Using different econometric techniques, I find that these Central Banks, with the exception of Chile, suffer from “fear of floating” (i.e., the Central Bank combat depreciations more aggressively than appreciations), and that this is more pronounced for the case of Brazil and Mexico, as the literature have argued.