Battilossi, Stefano

English

Research Papers in Economics

Book Reviews 1177
Exchange Rate Regimes: Choices and Consequences. By Atish R. Ghosh, Anne-Marie
Gulde, and Holger C. Wolf. Cambridge, MA, and London: The MIT Press, 2002. Pp.
232. $32.95.
This book, written by two IMF economists and an academic for an audience of peers and
policymakers, has two major strong points. First, it offers an effective guide to the modern
literature on exchange-rate regimes and their potential—although not unambiguous and
highly conditional—consequences on macroeconomic performance. Second, by adopting
a “unabashedly empirical” approach, it tests theory against the experience of 147 IMF
member countries in 1970–1999. A comprehensive bibliography and a CD ROM including
the whole data base used by the authors are just additional valuable assets of the volume.
Atish Ghosh, Anne-Marie Gulde, and Holger Wolf start with a concise historical pro-
logue. This chapter however serves only to emphasize that the collapse of Bretton Woods
marked a watershed. A century-long era during which countries’ choices were “circum-
scribed by prevailing norms of the international monetary system” (p. 23) was then brought
to an end, giving way to a “brave new world” in which governments became virtually
unconstrained in their policy choices. However—and this is the book’s only serious
flaw—no analysis whatsoever of the determinants of such choices is offered. In fact, the
sizeable literature on optimal regime choice is barely mentioned in an endnote, and recent
studies on the political economy of exchange rate policy (for a review, see J. Frieden, E.
Stein, “The Political Economy of Exchange Rate Policy in Latin America: An Analytical
Overview.” Inter-American Development Bank, Research Network Working Paper no. R-
420, 2000) are simply ignored.
On empirical grounds, identification problems—that is, how to decide whether a country
is actually running a pegged, an intermediate (such as a target zone or a managed float) or
a full floating regime—are addressed by using a “de jure” classification that focuses on the
central banks’ announced commitment. Moreover, the authors check the robustness of this
forward-looking approach against a mixed “de jure-and-de facto” classification that takes
into account the observed time path of the nominal exchange rate. This method allows them
to exclude ambiguous cases such as “soft” pegs and “hard” floats, thus considerably im-
proving the reliability of their results (pp. 46–51).
The authors provide empirical generalizations that compellingly demonstrate a strong
link between pegged regimes and better inflation performance in the long run, confirming
the existence of both a “monetary discipline effect” and a “credibility bonus.” As expected,
the link was found to be more relevant for developing and emerging countries where alter-
native disciplinary devices, such as central bank independence or higher capital mobility,
were weaker. Robustness tests controlling for country-specific fixed effects and for a possi-
ble bias stemming from endogenous regime choice (i.e., due to the fact that low-inflation
countries are more likely to adopt pegs) confirm these findings (pp. 81–89). On the con-
trary, the evidence of a long-run nexus between exchange rate and growth performance is
much more ambiguous. In fact, the authors find a growth bonus statistically associated with
pegs, but, after controlling for a number of possible determinants, conclude that country-
specific fixed effects and an endogeneity bias account for most of it (pp. 93–99).
Switching to a short-run analysis in the final part, Ghosh, Gulde, and Wolf suggest that
the so-called Syndrome of Exchange Rate-Based Stabilizations, according to which peg-
based stabilizations are more prone to fail, to lead to banking and currency crises, or to
entail extremely high costs in terms of negative economic growth, should not be general-
ized. Durable disinflations, they argue, depend in the end on the extent of fiscal adjustment
and monetary discipline achieved (p. 119), and the experience of Argentina in the 1990s
demonstrates that a peg is no “magic bullet” without robust fiscal and structural reforms
(pp. 135–47).1178 Book Reviews
Although the volume has no explicit normative purposes, the authors convey a clear
message in favor of pegged regimes combined with some degree of flexibility. To support
this view, they show that, in the long run, floats do not necessarily entail greater volatility
of the real exchange rate—indeed, they may help developing countries to reduce it by
offsetting inflation differentials (pp. 54–60). They also insist that governments should learn
carefully to design transition strategies in order to voluntarily exit unsustainable pegs, thus
avoiding the “fear of exit” syndrome that so often in the past decade delayed exit until
speculative attacks forced spectacular collapses. Elaborating on the drawbacks of Argen-
tina’s currency board experiment in the 1990s, they actually suggest that a “floating cur-
rency board” might be used to get the right mix of credibility and flexibility (pp. 162–63).
This policy suggestion adds further interest to a book that makes a valuable contribution to
the current debate on the future international exchange rate system.
STEFANO BATTILOSSI, Universidad Carlos III Madrid
The End of Globalization: Lessons from the Great Depression. By Harold James. Cam-
bridge, MA: Harvard University Press, 2001. Pp. vi, 260. $42.5, cloth; $18.95, paper.
A broad synthesis on the Great Depression by such a productive and original scholar as
Harold James could only have much appeal. The result is surprising, not very homoge-
neous, but with many very interesting insights and much solid scholarship. The book has
six chapters. The introduction presents the nineteenth-century globalization and its limits
in a broad, interdisciplinary, perspective. The three following chapters are much more in
the tradition of modern economic history. Their relative sizes reflect results both from the
relevant literatures and from the previous works of the author, maybe exaggerating their
actual relative importance: money and banking (chapter 2) as well as trade and tariffs
(chapter 3) benefit from a much more detailed analysis (70 pages each) than the “reaction
against international migration” (chapter 4) or chapter 5 on “the age of nationalism versus
the age of capital,” with only 20 pages each. The book ends with a substantial “can it
happen again?” conclusion.
The really good point of the book is its unification of three traditions of scholarships, up
to now frequently separated—money, trade, and migrations—within a unique framework.
The common framework is given in the introduction, which proposes a broad methodologi-
cal perspective for the study of globalization, based on the hypothesis “that globalism fails
because humans and the institutions they create cannot adequately handle the psychological
and institutional consequences of the interconnected world. Institutions “. . .  become the
major channels through which the resentments against globalization work their destruction”
(p. 5). This justifies the focus of the book on those institutions created by the nation states
(themselves the highest level institutions protecting against global problems) to handle
globalization: tariffs, central banks, and immigration legislation. In addition to that method-
ological proposal, which is developed throughout book, James also discusses globalization
in a broad intellectual tradition from the Reformation to the “nineteenth century and its
sins,” with the examples of Ortega y Gasset, Marx, Wagner and Lord Salisbury (among
others) intellectual, artistic, and philosophic reactions against globalization.
Chapter 2 on monetary and financial problems is a perfect and less surprising synthesis
of a now well-established literature. It places banking crises at the center of both the inter-
national and national crises, and somewhat less emphasis on the responsibility of the gold
standard as a transmission mechanism than has been fashionable recently. It details the day-
to-day events of the crisis, but also gives a more original account of its structural origins by
insisting on the tensions between national (budgetary) and supranational (gold-standard)
objectives as well as those between nations.

Exchange rate regimes : choices and consequences [book review].

http://e-archivo.uc3m.es/bitstream/10016/5595/1/exchange_battilossi_JEH_2003.pdf

Exchange rate regimes : choices and consequences [book review].

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