Testing the Unstable Middle and Two Corners Hypotheses About Exchange Rate Regimes

The recent rash of international currency crises has generated considerable interest in the role that exchange rate regimes have played in contributing to these crises. Many economists have argued that efforts to operate adjustably pegged exchange rate regimes have been a major contributor to “the u...

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Bibliographic Details
Published in:Open economies review 2009-02, Vol.20 (1), p.61-83
Main Authors: Angkinand, Apanard, Chiu, Eric M. P., Willett, Thomas D.
Format: Article
Language:English
Subjects:
Capital movement
Classification
Correlation analysis
Crises
Currencies
Currency
Development Economics
Economic crisis
Economic Policy
Economics
Economics and Finance
Economists
European Integration
Exchange rates
Fixed exchange rates
Floating exchange rates
Foreign exchange rates
Hypotheses
Interest rates
International Economics
Macroeconomics/Monetary Economics//Financial Economics
Monetary economics
Research Article
Risk
Studies
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Summary:The recent rash of international currency crises has generated considerable interest in the role that exchange rate regimes have played in contributing to these crises. Many economists have argued that efforts to operate adjustably pegged exchange rate regimes have been a major contributor to “the unstable middle” hypothesis and some have argued that this unstable middle is so broad that only the two corners of hard fixes or floating rates will be stable in a world of high capital mobility—the two corners or bipolar hypothesis. Two recent empirical studies by researchers at the International Monetary Fund reach opposing conclusions on these issues. We examine the issue further and show that conclusions can be quite sensitive to how exchange rate regimes are grouped into categories and the measures of currency crises that are used. In general we find that the dead center of the adjustable peg is by far the most crisis prone broad type of exchange rate regimes, but that countries need not go all the way to freely floating rates or hard fixes to substantially reduce the risks of currency crises.
ISSN:0923-7992
1573-708X
DOI:10.1007/s11079-007-9066-0