Exchange Rate Regimes in the Countries

In this study, we will try to show the examples of countries and we will also try to state the developing countries subject to their currency regime. When we start with the hard peg regimes, we can show the countries that have applied currency board regimes which are depicted as of December 2007 in the following table. Nevertheless, GDP and population data is older.

Currency Board Applications

Country	Population	GDP (US$)	Began	Exchange rate / remarks
Bermuda	63.000	$2 billion	1915	Bermuda $1 = US$1
Bosnia	3.800.000	$6.2 billion	1997	1.95583 convertible marks = 1 euro
Brunei	336.000	$5.6 billion	1952	Brunei $1 = Singapore $1
Bulgaria	7.800.000	$35 billion	1997	1.95583 leva = 1 euro
Cayman Islands	35.000	$930 million	1972	Cayman $1 = US$1.20
Djibouti	450.000	$550 million	1949	177.72 Djibouti francs = US$1
Estonia	1.400.000	$7.9 billion	1992	8 kroons = 0.51129 euro
Falkland Islands	2.800	Unavailable	1899	Falklands £1 = UK£1
Faroe Islands	45.000	$700 million	1940	1 Faroese krone = 1 Danish krone
Gibraltar	29.000	$500 million	1927	Gibraltar £1 = UK£1
Hong Kong	7.100.000	$158 billion	1983	Hong Kong $7.80 = US$1
Lithuania	3.600.000	$17 billion	1994	3.4528 litai = 1 euro
Saint Helena	Very small	Unavailable	1976	Saint Helena £1 = UK£1

As seen from the above table, not so many countries and the major economies are applying this regime. Furthermore, some of the above countries like Cayman Islands and Falkland Islands are colonies of UK and hence they are applying currency board against UK Pound. In this list, the developing countries such as Bulgaria, Bosnia and Lithunia can be seen as the adapters of this regime.

After analyzing the world economies that have applied currency boards, we will show the dollarized economies which are depicted below. As understood from the below table and the above explanations, dollarization doesn’t mean that the country is using US Dollar currency only. This term also includes the other respectable foreign currencies such as Euro, Australlian Dollar etc.

Dollarized Countries

Economy	Population	GDP ($bn)	Political status	Currency	Began
American Samoa	67.000	0,5	U.S. territory	U.S. dollar	1899
Andorra	68.000	1,2	independent	Euro	1278
British Virgin Isl.	21.000	0,3	British dependency	U.S. dollar	1973
Cocos Islands	600.000	0	Australian territory	Australian dollar	1955
Cook Islands	21.000	0,1	New Zealand territory	NZ dollar	1995
Cyprus, Northern	140.000	0,8	Independent	Turkish lira	1974
East Timor	857.000	0,2	independent	U.S. dollar	2000
Ecuador	13.200.000	37,2	Independent	U.S. dollar	2000
El Salvador	6.200.000	24	Independent	U.S. dollar	2001
Greenland	56.000	1,1	Danish region	Danish krone	1800s
Guam	160.000	3,2	U.S. territory	U.S. dollar	1898
Kiribati	94.000	0,1	independent	Australian dollar	1943
Kosovo	1.600.000	?	U.N. administration	Euro	1999
Liechtenstein	33.000	0,7	independent	Swiss franc	1921
Marshall Islands	71.000	0,1	independent	U.S. dollar	1944
Micronesia	135.000	0,3	independent	U.S. dollar	1944
Montenegro	700.000	1,6	semi-independent	Euro	2002
Monaco	32.000	0,9	independent	Euro	1865
Nauru	12.000	0,1	independent	Australian dollar	1914
Niue	2.000	0	New Zealand territory	NZ dollar	1901
Norfolk Island	2.000	0	Australian territory	Australian dollar	1900s
Nort. Mariana Isl.	75.000	0,9	U.S. commonwealth	U.S. dollar	1944
Palau	19.000	0,1	independent	U.S. dollar	1944
Panama	2.800.000	16,6	independent	U.S. dollar	1904
Pitcairn Island	42.000	0	British dependency	U.S. dollars	1800s
Puerto Rico	3.900.000	39	U.S. commonwealth	U.S. dollar	1899
San Marino	27.000	0,9	independent	Euro	1897
Tokelau	1.500	0	New Zealand territory	NZ dollar	1926
Turks&Caicos Isl.	18.000	0,1	British colony	U.S. dollar	1973
Tuvalu	11.000	0	independent	Australian dollar	1892
U.S. Virgin Islands	120.000	1,8	U.S. territory	U.S. dollar	1934
Vatican City	1.000	0	independent	Euro	1929

There are not many developing countries that have applied dollarization as a foreign exchange regime.

When we come to soft peg regimes we have seen that they have triggered the financial crises in many developing countries. Because of this, many countries have exited peg regimes. The following figure presents scattered plots for GDP growth in either the year of an exit or the year after (whichever is lower) against the duration (in months) of the regime in place prior to the exit (Aizenman and Glick, 2005). As it seen from the graph, most of the countries have given up this regime before 200 months. Moreover, among these countries most of them have exited this regime in the first 2-3 years. This has proven that peg regimes require very careful and detailed study before applying it. In addition to this, even after a careful study, overall economy and the active players in this economy should be monitored whether they are applying the rules defined before starting to this regime or not. Therefore, the audit mechanism has to work effectively.



Exits from Peg Regimes



 

 

 

 

 

 

 

 

 

 

 

Source: (Aizenman and Glick, 2005)

When we look at the countries applying this regime, we have seen that some developing countries have entered this regime more than one time such as Argentina and Israel. Some of the exits happened just after the financial crises in some countries such as Mexico (half of the reserves which corresponds to USD 15 million, was lost, Argentina and Finland. Nevertheless; Azerbaijan, Botswana, Costa Rica, Iran and Nicaragua have been using crawling peg regimes as of 31 July 2006 (IMF, 2006).

The countries using or have used managed floating regimes are summarized as Argentina, Bangladesh, Cambodia, Gambia, Ghana, Haiti, Jamaica, Madagascar, Malawi, Mauritius, Moldova, Mongolia, Sri Lanka, Sudan, Tajikistan, Tunisia, Uruguay, Yemen, Rep. of Zambia, Colombia, Czech Rep., Guatemala, Peru, Romania, Serbia, Thailand, Afghanistan, Armenia, Georgia, Kenya, Kirgiz Rep. Mozambique, Algeria, Angola, Burundi, Croatia, Dominican Rep., Guinea, India, Kazakhstan, Liberia, Malaysia, Myanmar, Nigeria, Papua New Guinea, Paraguay, Russian Federation, Singapore and Uzbekistan (IMF, 2006). It seems that many developing countries have been applying or applied (such as Argentina) this regime.

The countries that have been using or have used independently floating exchange regimes are stated as; Albania, Congo, Indonesia, Uganda, Australia, Brazil, Canada, Chile, Iceland, Israel, Korea, Mexico, New Zealand, Norway, Philippines, Poland, South Africa, Sweden, Turkey, United Kingdom, Tanzania, Japan, Somalia, Switzerland and United States (IMF, 2006). As it is seen from this list, most of the developed countries that are out of EU region and North America are listed here. However, some of the developing countries such as Turkey, Israel, Korea, Mexico, Brazil and Argentina are applying this regime.

To sum up, most of the developed countries prefer independently floating regimes. However, there are some developing countries such as Turkey that have been applying the same. Many developing countries have been applying managed floating regimes and it gives their central bank to play on the exchange rate according to the financial and fiscal targets of the country. Soft peg regimes have been used in the past but most of the countries have exited from this regime due to the financial instability happened before. This means that most of the developing countries will not prefer soft peg or hard peg regimes in the future.

References:

AIZENMAN, Joshua and GLICK Reuven., 2005, Pegged Exchange Rate Regimes – A Trap?, Federal Reserve Bank of San Fransisco Working Paper Series, pp.3-7

International Monetary Fund (IMF)., 2006, De Facto Classification of Exchange Rate Regimes and Monetary Policy Framework, http://www.imf.org/external/np/mfd/er/2006/eng/0706.htm