The duration of fixed exchange rate regimes



titative information to provide a monthly classification that covers all IMF members since
1990. Most information is obtained through bilateral consultation discussions with mem-
ber countries, as well as through regular contacts with IMF desk economists, supplemented
by other sources of information such as press reports, news articles, and other relevant pa-
pers, and supported by an analysis of the observed behaviour of the nominal exchange
rate and international reserves. Ghosh, Gulde and Wolf (2002) construct an annual index
of exchange rate flexibility that is mapped into a discrete number of regime categories
according to the relative frequency distribution of the de jure annual classification.

Some approaches disregard qualitative information altogether and rely exclusively on
observed macroeconomic time series. Shambaugh (2004) constructs a binary classification
of fixed and flexible regimes, on the basis on the monthly behaviour of the nominal exchange
rate. A fixed exchange rate regime is identified if the exchange rate has remained within ±2
percent bands against the base currency during the year. Levy-Yeyati and Sturzenegger
(2005) make use of a cluster analysis to classify countries into different regime categories
according to the volatility of exchange rates and international reserves. A fixed exchange
rate regime is typically characterized by volatility in international reserves in order to
stabilize the exchange rate at the announced parity. In contrast, floating exchange rates
feature significant exchange rate volatility while foreign exchange reserves remain rather
stable.

Reinhart and Rogoff (2004) address two important issues that other studies have not
examined. Firstly, the existence of dual or multiple exchange rates, and/or parallel mar-
kets, means that market-determined exchange rates can differ significantly from officially
reported exchange rates. Failing to look at market-determined rates leads to misleading
perceptions about the underlying monetary policy and the ability of the economy to ad-
just to shocks. Secondly, other classifications identify short-term spells of exchange rate
stability within a regime rather than regimes themselves. The realignment of a central
parity in a target zone would be captured as a regime change in other classifications, when
in fact only a parameter of the regime changes. Reinhart and Rogoff (2004) use historical
chronologies to assess whether there are dual or multiple exchange rates, and/or paral-
11



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