Fear of floating in Asia and the credibility of true floaters?

• Published in: Research in international business and finance 2017-12, Vol.42, p.149-160
• Main Authors: Rizvi, S.K.A., Naqvi, Bushra, Mirza, Nawazish, Bordes, Christian
• Format: Article
• Language: English
• Subjects: Asia; Exchange rate regime; Fear of floating; Flexibility; Pegging
• ISSN: 0275-5319; 1878-3384
• DOI: 10.1016/j.ribaf.2017.05.007

[Display omitted] •Fear of floating still exists and prevalent in Asian economies, a revisit of exchange rate regime suggests.•Interestingly the economies widely known and believed as true floaters seem to exhibit this fear too.•Contrary to expectations, the reserves are more volatile in de jure floating economies, implying covert interventions to stabilize exchange rate.•The results validate our concerns regarding the IMF’s methodology of regime classification intermingling credible inflation targeting with fear of floating.•Instead of bipolar solution, intermediate regimes seem better choice for Asian economies. Quite often, countries commit to free floating exchange rate (ER) regimes but do not allow their ERs to float freely, exhibiting a fear of floating. We revisit ER regimes in Asia following the work of Calvo and Reinhart (2002), and also develop a new flexibility index based on probabilities gauging interventions in FX market. In light of our findings, we cannot disregard the existence of fear of floating in Asia, and find that economies widely known as truly floating economies exhibit this fear too. Further, the results validate our concerns regarding the IMF’s methodology of regime classification intermingling credible inflation targeting with fear of floating.