Free DP Download 18 November 2021 - Rethinking Exchange Rate Regimes

Thursday, November 18, 2021

Ethan Ilzetzki, Carmen Reinhart and Kenneth Rogoff

CEPR Discussion Paper No. 16722 | November 2021

A new CEPR study by Ethan Ilzetzki, Carmen Reinhart and Kenneth Rogoff employs an updated algorithm and database for classifying exchange rate and anchor currency choice, to explore the evolution of the global exchange rate system, including parallel rates, capital controls and reserves. The authors focus on data from the last two decades, and several key insights emerge:  

  • The US dollar is even more central to the international financial system than was previously understood and its reach has increased in the 21st century
  • The rise of the euro as an international currency has been far more muted than most economists anticipated two decades ago.
  • The renminbi, still in the shadow of the yen in 2000, has emerged as a contender. But although the renminbi may well be the global currency in the year 2100, to date it has still made limited headways as an international currency. In fact, Chinese overseas lending practices have reinforced rather than diminished the role of the dollar, as Chinese official lending has been overwhelmingly denominated in US dollars to date.
  • De facto exchange rate flexibility has not increased as many had expected, nor have hard fixes with the very important exception Eurozone countries. Intermediate regimes, that range from crawling pegs to managed floating with varying degrees of “management,” dominate. However, despite the scope for floating, exchange rates in general have become notably more stable than in the “non-system” era of the late 20th century.
  • Perhaps most surprisingly, these trends in exchange rate stability have extended to the core of the international monetary system, where G3 currency volatility has declined, precipitously so since 2014.
  • Most currencies are now convertible and capital controls have been removed gradually both in high income and subsequently in developing countries (albeit the pandemic, especially, led to uptick).
  • Massive accumulation of safe (primarily dollar-denominated) assets is in part due to central banks’ attempts to manage their exchange rate while allowing capital to flow freely.

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