24 Ekim 2012 Çarşamba

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

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