1. Surprising Similarities: Recent Monetary Regimes of Small Economies Andrew K. Rose Berkeley-Haas, CEPR and NBER

2. Key Question Global Financial Crisis (GFC) spread globally, especially via capital (and trade) flows How did outcomes for small economies vary by monetary regime? – Did one monetary regime provide more insulation from GFC spillovers? Rose: Monetary Regime Similarities2

3. Focus 1.Recent Period – Panel of data, mostly focusing on period of and since GFC (2007-2012) 2.Small Countries – Who’s Small? The non-large (>170 countries) Exclude the IMF Systemic-5 China, EMU, Japan, UK, USA Rose: Monetary Regime Similarities3

4. Key Finding 1 Monetary regimes of small economies have been stable recently Unexpected because: – Historical counter-cyclicality – Size of GFC and Great Recession Why the Stability? What’s New? – Countries that Float with Inflation Targeting – (Hard Fixes always around) Rose: Monetary Regime Similarities4

5. Key Finding 2 Remarkably Similar Recent Outcomes for Hard Fixers and Inflation Targeters – Business Cycles, Inflation, Capital Flows, Responses to Capital Flows … Implausible or Boring? – Surprising since these appear to be two very different monetary regimes – Banal for literature (since Baxter-Stockman), since regimes matter for little except exchange rate Rose: Monetary Regime Similarities5

6. Data Set Annual Panel Standard sources (WDI, Polity IV, EFW, IFS, BIS) Rose: Monetary Regime Similarities6

7. Measuring the Monetary Regime 1.Issue: de jure or de facto? 2.Issue: exchange rate or monetary regime? 3.Issue: want recent span Solution: de facto monetary regimes from IMF Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) – Potential problem: short span (2001-2012) Rose: Monetary Regime Similarities7

8. de facto Alternatives Levy-Yeyati and Sturzenegger – Exchange rate regimes through 2004 Reinhart and Rogoff – Exchange rate regimes through 2010 Stone and Bhundia – Monetary Regimes 1990-2005 Rose: Monetary Regime Similarities8

9. Monetary Regimes of the Small AREAER: country-years split into 44 cells – Depends on Degree of exchange rate rigidity orientation of fix (if any) objective of float (inflation, money aggregate, ‘other’) My focus: two extreme monetary regimes – Floating with Inflation Target AREAER criteria deliver similar results to Mishkin’s 5 – Hard Fix Rose: Monetary Regime Similarities9

10. 2006 Monetary Regimes for Small 26 float with inflation target – 1 left by 2012 (Slovakia for EMU) 83 hard fix – No separate legal tender; currency board; conventional peg (Conv. Peg: Bahamas, Denmark, Latvia, Saudi Arabia, Benin, Namibia …) (Insensitive to inclusion: appendix) – 23 left by 2012 Rose: Monetary Regime Similarities10

11. Inflation Targeters Continuously 2006-12 ArmeniaAustraliaBrazilCanadaChile ColombiaCzech RepublicGuatemalaHungaryIceland IndonesiaIsraelKorea, Rep.MexicoNew Zealand NorwayPeruPhilippinesPolandRomania South AfricaSwedenSwitzerlandThailandTurkey Rose: Monetary Regime Similarities11

12. Inflation Targeter in 2006, Exited by 2012 Rose: Monetary Regime Similarities12 Slovakia(Joined Euro)

13. Hard Fixers Continuously 2006-12 Rose: Monetary Regime Similarities13 Antigua & Barb.ArubaBahamasBahrainBarbados BelizeBeninBhutanBosnia & Herz.Brunei BulgariaBurkina FasoCameroonCape VerdeCen. Afr. Rep. ChadComorosCongo, Rep.Cote d'IvoireDenmark DjiboutiDominicaEcuadorEl SalvadorEq. Guinea EritreaFijiGabonGrenadaGuinea-Bissau Hong KongJordanKiribatiLatviaLesotho LibyaLithuaniaMaliMarshall IslandsMicronesia MontenegroMoroccoNamibiaNepalNiger OmanPalauPanamaQatarSamoa San MarinoSaudi ArabiaSenegalSt. Kitts & NevisSt. Lucia St. Vinc. &Gren.SwazilandTimor-LesteTogoUnit Arab Emir.

14. Hard Fixers in 2006, Exited by 2012 Rose: Monetary Regime Similarities14 Azerbaijan(Float, Other)Mauritania(Float, Other) Belarus(Float, Other)Pakistan(Float, Mon Targ) Cyprus(Euro)Seychelles(Float, Mon Targ) Egypt(Float, Other)Slovenia(Euro) Estonia(Euro)Solomon Islands(Float, Other) Honduras(Soft Fix)Syria(Soft Fix) Lebanon(Soft Fix)Trinidad & Tobago(Soft Fix) Macedonia(Soft Fix)Ukraine(Float, Mon Targ) Maldives(Soft Fix)Vanuatu(Soft Fix) Malta(Euro)Vietnam(Soft Fix)

15. Hard Fixers in 2006 and 2012 but not continuously in between Rose: Monetary Regime Similarities15 KuwaitTurkmenistanVenezuela

16. “Sloppy Center” Remaining Soft fixes (stabilized, crawling peg/band, pegged exchange rate within horizontal bounds); Floating with a monetary target (variants including crawl-like, managed, or free floats) Floating ‘Other’ 32 in 2006-2012 (17 with AREAER switches) – 30 switched out by 2012 Rose: Monetary Regime Similarities16

17. Sloppy Center Continuously 2006-12 (* indicates switched IMF de facto Monetary regime) Rose: Monetary Regime Similarities17 AfghanistanAlgeria*BotswanaBurundi*Cambodia* Congo, D. Rep.*Costa Rica*Gambia, TheGuinea*Haiti* IndiaIraq*Jamaica*KenyaKyrgyzstan* Lao PDR*Liberia*MadagascarMalaysiaMauritius* MozambiqueMyanmar*NicaraguaPap. N Guinea*Paraguay* Singapore*SomaliaSudan*TanzaniaTonga UgandaZambia

18. Sloppy Center in 2006, Exited by 2012 Rose: Monetary Regime Similarities18 Albania(Inflat. Target)S Tome & Prin(Hard Fix) Dom Repub.(Inflat. Target)Serbia(Inflat. Target) Georgia(Inflat. Target)Uruguay(Inflat. Target) Ghana(Inflat. Target)Zimbabwe(Hard Fix) Moldova(Inflat. Target)

19. Sloppy Center in 2006 and 2012 but not continuously in between Rose: Monetary Regime Similarities19 AngolaArgentinaBangladeshBoliviaCroatia EthiopiaGuyanaIranKazakhstanMalawi MongoliaNigeriaRussiaRwandaSierra Leone Sri LankaSurinameTajikistanTunisiaUzbekistan Yemen

20. Durability of Monetary Regimes Small Economies --- Monetary Regime in 2006 --- 2012 Mon. RegimeInflat. Targeting (26)Hard Fix (83)Sloppy Center (62) Inflation Targeting2507 Hard Fix0632 Sloppy Center01653 EMU Entrants140 % continuously in regime since 2006 96% 72% 23% % 2011 Global GDP20% 4% 7% Rose: Monetary Regime Similarities20

21. Sloppy Center: Turnover is Big and (Counter-) Cyclic # Shifts in IMF De Facto Monetary Regime Global Real GDP Growth 200227 2.9 20038 3.7 20047 5.0 20059 4.6 20067 5.3 200711 5.4 200828 2.8 200937 -0.6 20107 5.2 201121 4.0 20128 3.2 Rose: Monetary Regime Similarities21

22. Representative? Since 1970, regime turnover has been high and (counter-) cyclic Rose: Monetary Regime Similarities22

23. Durability of Monetary Regimes, Small Economies: Historical Volatility (excludes Germany, Japan, UK, USA) % Continuously in same:All CountriesFixers Reinhart-Rogoff regime, 1970-76 55%59% (% 1976 Global GDP)12.3%6.4% Reinhart-Rogoff regime, 1980-86 60 %75% (% 1986 Global GDP)28.4%3.3% Levy-Yeyati-Sturzenegger regime, 1980-86 53 %58 % (% 1986 Global GDP)9.1% Rose: Monetary Regime Similarities23

24. Historical Cyclicality of Monetary/Exchange Rate Regimes Business Cycle Measure: GDP: HP GDP: BK GDP: CF GDP: Growth GDP: Linear Unemp. Rate Stone-Bhundia (1990-2005) -14.9** (4.0) -16.7** (4.2) -12.9** (4.0) -.04 (.02) -5.3** (1.7).13* (.05) Levy-Yey.-Sturzen. (1974-2004) -1.6 (1.2) -2.0 (1.2) -2.1 (1.2) -.01 (.01) -1.4** (.4).04 (.03) Reinhart- Rogoff (1970-2006) -1.7 (1.1) -1.9 (1.1) -2.0 (1.1) -.003 (.007) -1.1** (.4).07* (.03) Rose: Monetary Regime Similarities24

25. Conclude: Stability from Inflation Targeting Regimes New Significant Acyclic Rose: Monetary Regime Similarities25

26. Monetary Regimes by the Numbers: Counting Countries Rose: Monetary Regime Similarities26

27. Monetary Regimes by the Numbers: Sizing Up the Economies Rose: Monetary Regime Similarities27

28. Tangent: Determinants of Monetary Regimes Remarkably little known – Recent surveys in Klein and Shambaugh (2010), Rose (2011) Literature: focus on (sluggish) levels Here: use Stone-Bhundia regimes (through 2005, pre-dates GFC) – Size, income, institutions, openness Rose: Monetary Regime Similarities28

29. Characteristics Across Monetary Regimes: Univariate Evidence Averages:Sloppy CenterHard FixInflation Target Hard Fix = Inflation Target (t-test) Log Population16.515.516.6-8.3** Log R GDP p/c8.99.49.7-4.6** Polity5.73.19.4-10.1** Trade %GDP84.588.868.75.0** Chinn-Ito.4.71.3-4.3** Inv Free, EFW59.857.466.4-5.2** Fin Free, EFW52.957.566.5-4.8** M2 %GDP52.659.967.3-2.1* Credit %GDP198.8186.590.91.0 Rose: Monetary Regime Similarities29

30. Quantile Plots Compare (univariate) distribution of key characteristics across regimes Quantiles for different regimes plotted on different axes Similar distributions: data plotted along diagonal Rose: Monetary Regime Similarities30

31. Rose: Monetary Regime Similarities31

32. Determinants of Monetary Regimes : Multivariate Evidence Pop=0.00** Income=0.06.03*.14**.29.05*.03* Polity=0.00** Trade=0.24.27.22.38.25 Fin Open=0.56.37.28.75.20 Open=0.37.34.59.15 Fix=IT.00**.02*.00**.01* Obs11081043713 9981074 Pseudo R 2.18.20.25.19 Rose: Monetary Regime Similarities32

33. Hard to extend Univariate Success Multinomial Logit compares determinants of three regimes Rose: Monetary Regime Similarities33

34. Determinants of Monetary Regimes : Coefficient Estimates Hard Fix (versus Sloppy Center) Log Population -.33* (.14) -.50** (.16) -.58** (.18) -.53** (.19) -.60** (.17) -.48** (.16) Log Real GDP p/c.52 (.34).68* (.32).33 (.36).33 (.36).30 (.32).59 (.32) Polity -.07* (.04) -.09** (.03) -.07 (.04) -.09* (.04) -.10** (.03) -.09** (.03) Inflation Target Float (versus Sloppy Center) Log Population.60* (.26).50 (.33).92** (.33).87** (.30).77* (.36).51 (.33) Log Real GDP p/c.86* (.37).79* (.35).75* (.38).63 (.41).96* (.39).95** (.37) Polity.67** (.22).63** (.22).98** (.29).95** (.27).88** (.30).66** (.22) Rose: Monetary Regime Similarities34

35. Limited Success, No Surprises Small countries: more likely to (hard-) fix, less likely to target inflation Democracies: less likely to fix, more likely to target inflation Marginal effects of income No effect of real or financial openness Fit consistently poor! – Always hard to determine monetary regime Rose: Monetary Regime Similarities35

36. Consequences of Monetary Regime Initially take regime choice as exogenous/random – Not so bad in practice – Will verify with IV/matching: results insensitive Rose: Monetary Regime Similarities36

37. Compare Three Regimes Inflation Targeting Floats – Ex: Brazil, Korea, Mexico, Canada Hard Fixes – 60 durable (Saudi Arabia, Hong Kong, Denmark) Sloppy Center – India, Russia, Iran Rose: Monetary Regime Similarities37

38. Compare long-lived, durable regimes (IT/HF) 1.With sloppy center 2.With each other Throughout use period since 2006 Rose: Monetary Regime Similarities38

39. Quantile Plots: Outcomes for Hard Fixers Similar to Inflation Targeters Unexpected a priori: two dis-similar monetary regimes But univariate distributions surprisingly alike, much overlap Rose: Monetary Regime Similarities39

40. Rose: Monetary Regime Similarities40

41. Rose: Monetary Regime Similarities41

42. Rose: Monetary Regime Similarities42

43. Ditto Statistical Analysis Some differences between hard fixers and inflation targeters … but more similarities Not power: effects of HF/IT on inflation similar, significantly different from SC Rose: Monetary Regime Similarities43

44. Technical Stuff Panel LS on dummies for HF/IT – Omitted: sloppy center – Fixed time, random country effects (can’t do fixed) Regressands – Output consequences – Capital flows – Adjustment mechanisms Current account, capital controls, reserves, money, fiscal policy, real exchange rate appreciation, inflation Rose: Monetary Regime Similarities44

45. Effects of Monetary Regimes 2007-12: Regression Evidence on Output Regressand Inflation Targeting Hard Fix IT = H Fix? (P-value) IT = H Fix = 0? (P-value) BK-Filtered GDP.006 (.004) -.003 (.004).04*.10 HP-Filtered GDP -.002 (.001) -.004* (.001).13.04* CF-Filtered GDP -.02 (.02) -.00 (.04).77.76 Demeaned Growth -1.9* (.8) -1.4 (.8).56.04* Time- Detrended GDP -.04 (.03) -.08** (.02).16.01** Rose: Monetary Regime Similarities45

46. Effects of Monetary Regimes 2007-12: Regression Evidence on Capital Flows Regressand Inflation Targeting Hard Fix IT = H Fix? (P-value) IT = H Fix = 0? (P-value) Gross Capital Inflows 3.2 (3.2) -4.1 (6.4).90.57 Gross Capital Outflows -.0 (3.2) -3.2 (6.7).61.87 Net Capital Flows 3.2 (1.9).8 (1.6).03*.09 Std Dev Capital Inflows (c/s) 5.5 (4.2) 5.5 (6.9) 1.0.38 Std Dev Capital Outflows (c/s) 5.1 (4.2) 7.0 (7.4).82.36 Rose: Monetary Regime Similarities46

47. Effects of Monetary Regimes 2007-12: Regression Evidence, Adjustment 1 Regressand Inflation Targeting Hard Fix IT = H Fix? (P-value) IT = H Fix = 0? (P-value) Current Account 1.6 (1.4) 3.4 (5.5).73.49 Export Growth.01 (.01).00 (.01).70.85 Import Growth -.00 (.01).00 (.01).76.94 Chinn-Ito Capital Mobility -.1 (.4) -.5 (.3).41.24 Fin Freedom Change.01 (.01).00 (.01).16 Inv Freedom Change.03** (.01).01 (.01).01** Rose: Monetary Regime Similarities47

48. Effects of Monetary Regimes 2007-12: Regression Evidence, Adjustment 2 Regressand Inflation Targeting Hard Fix IT = H Fix? (P-value) IT = H Fix = 0? (P-value) M2 Growth (%GDP) -.01 (.01).00 (.01).18.41 International Reserve Growth -.4 (.4) -.5 (.4).26.44 Government Budget.3 (.8).7 (.9).70.74 Change in Budget.5 (.7) -.4 (.5).30.57 Rose: Monetary Regime Similarities48

49. Effects of Monetary Regimes 2007-12: Regression Evidence, Prices Regressand Inflation Targeting Hard Fix IT = H Fix? (P-value) IT = H Fix = 0? (P-value) CPI Inflation -4.4** (.7) -5.2** (.6).15.00** GDP Inflation -4.7** (.8) -5.2** (.7).41.00** Real Effective Exchange Rate -15.0 (9.8) -20.1* (9.6).13.05* Chg Real Effect Exchange Rate -3.9 (3.4) -5.4 (3.5).06.07 Growth in Stock Prices -4.5 (3.5) -11.8** (3.3).01**.00** Bond Yields (.8) (1.0).96.43 Growth in Property Prices 2.3 (4.8) -1.1 (5.1).35.63 Rose: Monetary Regime Similarities49

50. Sensitive to Estimation Technique? Use IV (size and polity: determination model) – Business cycle, investment freedom results disappear – Similar results for Inflation (*), stock prices Also use nearest-neighbor matching – Match on government spending (% GDP), unemployment rate – Similar results, especially for inflation Rose: Monetary Regime Similarities50

51. Summary Strong, Consistent Findings – Inflation lower (5%) for both hard fixers and inflation targeters (than SC) – Net (but not gross) capital flows, change in investment freedom higher for IT than HF Weak, Inconsistent/Marginal Finding – Worse business cycles, more real depreciation for both HF and IT (than SC) – Stock prices declined more for HF than IT Rose: Monetary Regime Similarities51

52. Most Intriguing Result Rarely significant difference between effects of inflation targeting and hard fixes Plausible? – These monetary regimes seem to vary wildly Amount of discretion Role of exchange rate Rose: Monetary Regime Similarities52

53. Consistent with Literature Rey (2013, italics added): “… analyses suggest monetary conditions are transmitted from the main financial centre to the rest of the world through gross credit flows and leverage, irrespective of the exchange rate regime. This puts the traditional “trilemma” view of the open economy into question. Fluctuating exchange rates cannot insulate economies from the global financial cycle, when capital is mobile.” – Note: Rey does not actually test relevance of exchange rate regime Rose: Monetary Regime Similarities53

54. Monetary Regime Matters Surprisingly Little: An Old Idea Klein and Shambaugh (2010), and references stretching back to … Baxter and Stockman (1989): – “Aside from greater variability of real exchange rates under flexible than under pegged nominal exchange-rate systems, we find little evidence of systematic differences in the behavior of macroeconomic aggregates or international trade flows under alternative exchange-rate systems.” Rose: Monetary Regime Similarities54

55. Summary Small economies that float with an inflation target behave similarly to hard fixers over the post-bubble period – Artifact of methodology? (used a few) – Small data set? (>160 countries, 6 volatile years) – Literature unable to find significant differences across monetary regimes Perhaps there simply are few Rose: Monetary Regime Similarities55

56. Conclusion: 1 Bulgaria and Romania: – Small open EMs in EU, reasonable improving institutions, similar income and size – Bulgaria in hard fix; Romania floats with IT Many other examples – Denmark and Sweden; Ecuador and Colombia; El Salvador and Guatemala; Cote d’Ivoire and Ghana; Bosnia-Herzegovina and Albania Similar countries choose different monetary regimes! Rose: Monetary Regime Similarities56

57. Conclusion: 2 Differences in monetary regimes can persist because they’re unimportant – Growth, output gap, inflation, fiscal policy, current account, reserve growth … do not vary much with monetary regime – So “insulation value” of different monetary regimes similar in practice – Consistent with literature if initially counter- intuitive (boring more than implausible) Rose: Monetary Regime Similarities57

58. Conclusion: 3 Small countries now have new stable alternative to hard fix; float with inflation target – Both hard fixers and inflation-targeting floats have survived GFC and aftermath This monetary stability new (compare: 1930s/1970s) Since countries in different monetary regimes behave similarly, can’t easily differentiate between regimes Rose: Monetary Regime Similarities58