Group 5 Slides ER Systems Surveillance Advice

BF 31203 FINANCIAL ECONOMICS
SEMINAR
GROUP 5
EXCHANGE RATE SYSTEMS,
SURVEILLANCE, AND ADVICE
By Stanley Fischer (2007)
GROUP MEMBERS MATRICS NO.
NURAFIZZA BINTI ABDUL HALIK BB16110280
NORAZIMAH BINTI NAWANG BB16110237
NORSAINA BINTI ABDUL SALLEH BB16110122
NURUL FARAH AIN BINTI WIRA BB16110217
SARSIRAH KOON@JAMALUDIN BB16110120
SITI NOR AKRIEMA ATHIRA BINTI BB16110335
MATUSIN
INTRODUCTION
 “IMF Exchange Rate Advice” – presented a critical view of the advice the
Fund had offered in the period 1999-2005 on exchange rate systems, level
of the exchange rate, and on the mechanics of exchange markets and
intervention.
 While the criticsms are forceful, they suffer from the lack of professional
consesus on what the right advice should be.
 State some lessons and questions about exchange rate system, and attempt
to state what is known and what is not known about them.
 Provide comments and advice about the problem on the IMF surveillance.
 ISSUE STATEMENT :
1. Argue that the bipolar view is fundamentally correct for emerging market&
industrialized countries with open capital
2. Provide comments about problems on IMF surveillance & also advices
METHOD
 Using secondary data (IMF AREAER database).
Using year 1991,1999 and 2006.
 Data analysed between developed countries (25
countries) and emerging market countries ( 39
countries).
 Probit regression- A type of regression where the
dependent variable can take only two values.
 Eg. (coded 1 if an intermediate regime, 0
otherwise)
RESULTS
 Bipolar view is fundamentally correct for emerging market
and industrialized countries with open capital accounts
 Bipolar view or two-corner solution is the belief that
intermediate regimes between hard pegs and free floating
are unsustainable.
 Fischer (2004) has stated that for countries open to
international capital flows:
1. Soft exchange rate pegs are not sustainable
2. A wide variety of flexible rate regimes remain possible
3. It is to be expected that policy in most countries will not
be indifferent to exchange rate movements
RESULTS
 As countries become more advanced and open their capital
accounts, they also tend to leave the middle ground of soft
pegs, and move towards either a hard peg or a floating
(including managed floating) regime.
 Why then the general recommendation to countries to avoid
the intermediate regimes if they are open to capital
movements?
 Primarily because such regimes are crisis prone, in part
because their policy dynamics are unstable.
 Rogoff (2003) stated that for advanced countries “ free floats
register faster growth than other regimes without incurring
higher inflation
Comments on IMF Surveillance and advice
 IMF has adopted a new Decision on  According to Mussa(2007), he asserts

Bilateral Surveillance which this that the Fund’s management should
article raise question. have taken an increasingly tough
stand, mentioning “the possibility of
 There has been a great deal of
formal censure of a country’s policies
criticism of the Fund for failing to by the Executive Board as a final
censure the Chinese authorities more resort for those rare and highly
seriously over their exchange rate regrettable cases where all vigorous
policies and growing current account but less extreme efforts at persuasion
surplus. have failed”
 So, what should the Fund that is  Thus, the Fund should be working very
newly equipped with the new hard to gain the trust of its member
decision on surveillance should be countries, should state its views firmly
doing with this? at all times, should press for policy
changes that it believes are important
through ever effective channel, and
reserve for very rare occasions a
decision to enter conflict with a
member.
DISCUSSION
o The bipolarity for the emerging market and other categories countries are
significant to capital controls
o When the exchange rate is not under pressure, the country sees no need to change
the regime and when it is under pressure the country is reluctant to change the
regime because it is unclear by how much it will have to change if it is re-pegged or
where it will go if it is allowed to find its own level.
o As a country develop and open their capital accounts, they tend to move towards
pegs while the others will move towards more flexible exchange rate
o The interest rate and fiscal policy can be used by central bank to intervene the
exchange rate in the exchange market.
o Changes in fiscal policy can be deployed to affect the real exchange rate over a
longer period, by tightening fiscal policy and increasing national saving, the
government can expect to generate a real depreciation and increase net exports.
o The monetary policy effects on the real exchange rate are likely to be temporary,
but may be of sufficient duration to have a transitional effect on exports and
imports.
DISCUSSION
o In the emerging market countries , even with flexible exchange rates there is
intervention to build up their reserves to prevent exchange rate appreciation.
o In Israel, the central bank does not intervene the foreign exchange market except in
extreme circumstances.
o For those countries other than those defined as developed or emerging market
countries, there has a movement from the floating rate to the intermediate regimes
and vice versa in order to have a sustain pegged rate.
o To sustain a pegged rate;
o A country with developing economy that applied the intermediate regimes
should have the capacity to perform well and flexibly, and maintain low
inflation.
o As the country become more developed, they should be moving away from
intermediate regimes to floating rate that have a greater flexibility of the
exchange rate or a hard peg.
CONCLUSION
 For countries open to international capital flows, Soft exchange rate pegs are not sustainable.
This belief that intermediate regimes between hard pegs and free floating are unsustainable
is known as the bipolar view, or two-corner solution
 As a country develop and open their capital accounts, the develop country will tend to move
towards pegs while the others will move towards more flexible exchange rate
 In Israel, the central bank does not intervene the foreign exchange market except in extreme
circumstances.
 Among countries without access to international capital markets, there has been a shift away
from soft pegs toward hard pegs on the one side and more flexible regimes on the other. On
balance, these countries are more likely to have hard pegs than the emerging market
economies and less likely to have floating rates or soft pegs
 Countries prefer a fixed exchange rate regime for the purposes of export and trade. By
controlling its domestic currency a country can – and will more often than not – keep its
exchange rate low. This helps to support the competitiveness of its goods as they are sold
abroad
 The decision of selecting one regime depends on the social and infrastructure of the country.
Also there may be customized exchange rate regimes which fall under one of the above
regimes. This applied according to the last decision of the country after consulting IMF in many
circumstance.

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BF 31203 FINANCIAL ECONOMICS

 IMF has adopted a new Decision on  According to Mussa(2007), he asserts

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