Discussion of Friedman Redux … by Ghosh, Qureshi and Tsangarides Andrew K. Rose Berkeley-Haas, NBER and CEPR

A Critique of a Critique “… no strong, robust or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion …” – Chinn-Wei Response here necessarily involves overturning negative finding with strong robust relationship – Trick: use bilateral (not multilateral) relationships – Ex: US vs. China AND vs. Canada AND vs. Mexico … Not US vs. RoW Gratuitous personal reference: Rose and Yellen (JME 1989) – Use both bilateral and multilateral data on similar issue 2 Rose: Comments on Ghosh, Qureshi and Tsangarides

Praise 1 Good question, well-motivated – Divergence between different bilateral US$ regimes a great example – Notice though: need an anchor for relevance Nice encompassing approach – Reproduce weak multilateral and then get strong bilateral results Easy to replicate (with their data) Rose: Comments on Ghosh, Qureshi and Tsangarides 3

Praise 2 Admirable sensitivity analysis – Cut data by income, change estimator… – Current account/trade balance, normalization (GDP/Trade) issues handled well Lithuania natural experiment (2002 switch from US$ to €) Ancillary support (real exchange rate movements) Rose: Comments on Ghosh, Qureshi and Tsangarides 4

What does it Mean? Suppose accept premise that relationship exists in bilateral but not multilateral data What does this mean? – Empirical Options Measurement Error: multilateral regime classification sucks, bilateral better – Plausible? Bilateral classifications derived from multilateral Sample size: too little multilateral data? – Too much bilateral? (left-handed labor economist) Rose: Comments on Ghosh, Qureshi and Tsangarides 5

Smaller Criticisms: 1 CFA franc zone experiment seems contrived, not compelling – France reliably pegged to DM, guilder, … pre-Euro – Ditto 1999 creation of Euro Does BOR data go back to 1980 reliably? Current accounts more interesting than trade imbalances (but highly correlated) Rose: Comments on Ghosh, Qureshi and Tsangarides 6

Smaller Criticisms: 2 “Multilateral” better than “aggregate” A good graph here would beat pages of regression coefficients Rose: Comments on Ghosh, Qureshi and Tsangarides 7

Soft Criticism 1: Why use Regime Classifications at All? Instead of using three bins (fix, intermediate, float), why not use continuous measure of exchange rate volatility? – Original motivation is whether more flexibility affects adjustment speed Rose: Comments on Ghosh, Qureshi and Tsangarides 8

Soft Criticism 2: Incomplete Model of Trade Balance Model links trade balance only to exchange rate regime, a lag and interaction Mis-specification orthogonal to regime interaction? Why not include other determinants of external account (model-dependent: output, real exchange rate, more lags for RY ’89; relative wealth, non-tradeables, etc)? Rose: Comments on Ghosh, Qureshi and Tsangarides 9

Soft Criticism 3: Much Ado about Little? Many differences are economically small – Many half-lives are just plain small! – Ex (pp 14-15): half-life of trade imbalance ≈ 1.2 years under fix.9 years under float (plausible?) So … difference is small (plausible? important?) Small regime differences also on p21;.1 year (But this is necessarily a short-run question) – All real exchange rates float at low frequencies Rose: Comments on Ghosh, Qureshi and Tsangarides 10

Hard Criticism 1: Does the Effect Work too Well? Rose: Comments on Ghosh, Qureshi and Tsangarides 11 Shouldn’t high inflation make nominal exchange rate regime irrelevant? Critical Negative Interaction (γ 3 ) Effect, Table 7 Country-pairs: a) unrestricted; both with b) moderate; or c) high inflation Inflation ObsOLS DJ CPFE DJ CPFE/TE DJ OLS DF CPFE DF CPFE/TE DF All 258, ** (.01) -.11** (.02) -.11** (.02) -.12** (.01) -.10** (.02) -.10** (.02) >10% 25, ** (.04) -.11 (.13) -.10 (.13) -.12** (.04) -.14 (.13) -.13 (.13) >25% 3, ** (.07) -.69** (.11) -.62** (.17) -.23** (.07) -.69** (.11) -.62** (.17)

Hard Criticism 2: Sensitivity over Time? Rose: Comments on Ghosh, Qureshi and Tsangarides 12 Is exact sample period relevant? Critical Negative Interaction (γ 3 ) Effect, Table 7 Inflation ObsOLS DJ CPFE DJ CPFE/TE DJ OLS DF CPFE DF CPFE/TE DF All 258, ** (.01) -.11** (.02) -.11** (.02) -.12** (.01) -.10** (.02) -.10** (.02) 1980s 50, ** (.02) -.13** (.05) -.13** (.05) -.11** (.02) -.11* (.05) -.11* (.05) 1990s 78, ** (.02) -.09 (.05) -.09 (.05) -.16** (.02) -.08 (.05) -.08 (.05) 2000s 128, ** (.01) -.07** (.03) -.07** (.03) -.10** (.01) -.06* (.03) -.06* (.03)

Hard Criticism 3: Are All Observations Equal? Rose: Comments on Ghosh, Qureshi and Tsangarides 13 Weighting by GDP eliminates De Jure Result Smaller Effect on (more important) De Facto Critical Negative Interaction (γ 3 ) Effect, Table 7 Regressions: a) unrestricted; b) weighted by real GDP OLS DJ CPFE DJ CPFE/TE DJ OLS DF CPFE DF CPFE/TE DF -.13** (.01) -.11** (.02) -.11** (.02) -.12** (.01) -.10** (.02) -.10** (.02) Weighted -.02** (.00) -.08 (.05) -.08 (.04) -.05** (.00) -.13** (.05) -.12** (.04)

Hard Criticism 4: Using Too Much Data? Rose: Comments on Ghosh, Qureshi and Tsangarides 14 Restricting to observations with an anchor Reduces/Eliminates Interaction Critical Negative Interaction (γ 3 ) Effect, Table 7 Regressions: a) unrestricted; b) with one anchor OLS DJ CPFE DJ CPFE/TE DJ OLS DF CPFE DF CPFE/TE DF -.13** (.01) -.11** (.02) -.11** (.02) -.12** (.01) -.10** (.02) -.10** (.02) With an Anchor -.07** (.01) +.00 (.02) +.00 (.02) -.06** (.01) +.03 (.03) +.03 (.03)

Basic Problem of Interpretation Country can choose a single monetary regime, but still has many bilateral exchange rates – US$ does not float freely against RMB – But US$ floats freely against € – Policy-induced flexibility is multilateral, not bilateral Seems natural to focus on one partner with whom have most significant/explicit arrangements – US floats against € – China manages RMB against US$ (an anchor) – (But … why throw away other bilateral information?) Rose: Comments on Ghosh, Qureshi and Tsangarides 15

Summary of Critique 1.Smaller – Why Use Regimes instead of Variability? – Silly Model of Trade Balance – Empirically Results are Modest 2.Bigger – Inflation Results Worrying: too good – Unimportant observations too important (early years; GDP-weighting; non-anchor: non-anchor) 3.What does it mean? – Country has one monetary policy, many bilateral exchange rates Rose: Comments on Ghosh, Qureshi and Tsangarides 16

What Would I do Differently? 1.Present and discuss these problems 2.Argue that they’re not a big deal Rose: Comments on Ghosh, Qureshi and Tsangarides 17