EXCHANGE RATES IN EMERGING COUNTRIES: ELEVEN EMPIRICAL REGULARITIES FROM LATIN AMERICA AND EAST ASIA Sebastian Edwards Working Paper 17074 http://www.nber.org/papers/w17074
NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2011
I have benefitted from discussions with a number of colleagues, including Ed Leamer, Al Harberger,Alberto Naudon, Juan Marcos Wlasiuk, and Roberto Alvarez. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. © 2011 by Sebastian Edwards. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given tothe source.
Exchange Rates in Emerging Countries: Eleven Empirical Regularities from Latin America and East Asia Sebastian Edwards NBER Working Paper No. 17074 May 2011 JEL No. F0,F31,F32,F41 ABSTRACT In this paper I discuss some of the most important lessons on exchange rate policies in emerging markets during the last 35 years. The analysis is undertaken from the perspective of both theLatin American and East Asian nations. Some of the topics addressed include: the relationship between exchange rate regimes and growth, the costs of currency crises, the merits of “dollarization,” the relation between exchange rates and macroeconomic stability, monetary independence under alternative exchange rate arrangements, and the effects of the recent global “currency wars” on exchange rates incommodity exporters.
Sebastian Edwards UCLA Anderson Graduate School of Business 110 Westwood Plaza, Suite C508 Box 951481 Los Angeles, CA 90095-1481 and NBER firstname.lastname@example.org
1 For years scholars and policy makers have tried to understand why long term economic performance has been so different in Asia and Latin America. A number of possible explanations have been given,including explanations based on culture, politics, colonial past, and institutions. There is little doubt that all of these are significant factors that affect long term growth and income distribution. But perhaps the most important cause behind the different outcomes in these two regions has to do with economic policies. By and large, the Asian countries have maintained macroeconomic stability(the 1997-1998 currency crises being, of course, an exception), while the Latin American nations have had an extremely volatile macroeconomy.1 It is, possibly, in the area of exchange rates where the contrast between the two regions has been more pronounced. While in the second half of the 20th century almost every Latin American country went from currency crisis to currency crisis, the Asiannations managed – with the already mentioned major exception of 1997-1998 – to maintain exchange rate stability. However, during the last decade or so things have changed significantly. Most Latin American nations seem to have learned the lessons of the past, and have avoided two perennial (and related) problems: pegging their currencies at artificially high levels, and defending these pegs even whenit was apparent that major adjustments (e.g. depreciation) were needed. This change became particularly evident in 2008-2011, during the so-called Great Recession. Contrary to what many observers feared, the vast majority of the Latin America nations were able to withstand major external shocks – including a sudden (and, as it turned out, short lived) reversal of capital inflows --, withoutexperiencing currency collapses or balance of payments crises. As many authors have noticed, a relatively stable (real) exchange rate that does not become overvalued is a key component of outward-oriented, export-based development strategies. In fact, a number of analysts have argued that China has deliberately maintained an undervalued exchange rate as a way of promoting exports. In addition, exchange...