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Discussion of Friedman Redux … by
Ghosh, Qureshi and TsangaridesAndrew K. Rose
Berkeley-Haas, NBER and CEPR
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A Critique of a Critique• “… no strong, robust or monotonic relationship
between exchange rate regime flexibility and the rate of current account reversion …”– Chinn-Wei
• Response here necessarily involves overturning negative finding with strong robust relationship – Trick: use bilateral (not multilateral) relationships– Ex: US vs. China AND vs. Canada AND vs. Mexico …
• Not US vs. RoW• Gratuitous personal reference: Rose and Yellen (JME
1989)– Use both bilateral and multilateral data on similar issue
2Rose: Comments on Ghosh, Qureshi and Tsangarides
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Praise 1
• Good question, well-motivated– Divergence between different bilateral US$
regimes a great example– Notice though: need an anchor for relevance
• Nice encompassing approach– Reproduce weak multilateral and then get strong
bilateral results
• Easy to replicate (with their data)
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Praise 2
• Admirable sensitivity analysis– Cut data by income, change estimator…– Current account/trade balance, normalization
(GDP/Trade) issues handled well
• Lithuania natural experiment (2002 switch from US$ to €)
• Ancillary support (real exchange rate movements)
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What does it Mean?
• Suppose accept premise that relationship exists in bilateral but not multilateral data
• What does this mean?– Empirical Options• Measurement Error: multilateral regime classification
sucks, bilateral better– Plausible? Bilateral classifications derived from multilateral
• Sample size: too little multilateral data?– Too much bilateral? (left-handed labor economist)
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Smaller Criticisms: 1
• CFA franc zone experiment seems contrived, not compelling– France reliably pegged to DM, guilder, … pre-Euro– Ditto 1999 creation of Euro
• Does BOR data go back to 1980 reliably?• Current accounts more interesting than trade
imbalances (but highly correlated)
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Smaller Criticisms: 2
• “Multilateral” better than “aggregate”• A good graph here would beat pages of
regression coefficients
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Soft Criticism 1: Why useRegime Classifications at All?
• Instead of using three bins (fix, intermediate, float), why not use continuous measure of exchange rate volatility?– Original motivation is whether more flexibility
affects adjustment speed
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Soft Criticism 2: IncompleteModel of Trade Balance
• Model links trade balance only to exchange rate regime, a lag and interaction
• Mis-specification orthogonal to regime interaction?
• Why not include other determinants of external account (model-dependent: output, real exchange rate, more lags for RY ’89; relative wealth, non-tradeables, etc)?
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Soft Criticism 3:Much Ado about Little?
• Many differences are economically small– Many half-lives are just plain small!– Ex (pp 14-15): half-life of trade imbalance ≈• 1.2 years under fix• .9 years under float (plausible?)• So … difference is small (plausible? important?)• Small regime differences also on p21; .1 year
• (But this is necessarily a short-run question)– All real exchange rates float at low frequencies
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Hard Criticism 1: Does the Effect Work too Well?
Rose: Comments on Ghosh, Qureshi and Tsangarides 11
Shouldn’t high inflation make nominal exchange rate regime irrelevant?
Critical Negative Interaction (γ3) Effect, Table 7
Country-pairs: a) unrestricted; both with b) moderate; or c) high inflation
Inflation Obs OLSDJ
CPFEDJ
CPFE/TEDJ
OLSDF
CPFEDF
CPFE/TEDF
All 258,075 -.13**(.01)
-.11**(.02)
-.11**(.02)
-.12**(.01)
-.10**(.02)
-.10**(.02)
>10% 25,461 -.12**(.04)
-.11(.13)
-.10(.13)
-.12**(.04)
-.14(.13)
-.13(.13)
>25% 3,899 -.23**(.07)
-.69**(.11)
-.62**(.17)
-.23**(.07)
-.69**(.11)
-.62**(.17)
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Hard Criticism 2:Sensitivity over Time?
Rose: Comments on Ghosh, Qureshi and Tsangarides 12
Is exact sample period relevant?
Critical Negative Interaction (γ3) Effect, Table 7
Inflation Obs OLSDJ
CPFEDJ
CPFE/TEDJ
OLSDF
CPFEDF
CPFE/TEDF
All 258,075 -.13**(.01)
-.11**(.02)
-.11**(.02)
-.12**(.01)
-.10**(.02)
-.10**(.02)
1980s 50,943 -.13**(.02)
-.13**(.05)
-.13**(.05)
-.11**(.02)
-.11*(.05)
-.11*(.05)
1990s 78,312 -.17**(.02)
-.09(.05)
-.09(.05)
-.16**(.02)
-.08(.05)
-.08(.05)
2000s 128,820 -.10**(.01)
-.07**(.03)
-.07**(.03)
-.10**(.01)
-.06*(.03)
-.06*(.03)
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Hard Criticism 3: AreAll Observations Equal?
Rose: Comments on Ghosh, Qureshi and Tsangarides 13
Weighting by GDP eliminates De Jure ResultSmaller Effect on (more important) De Facto
Critical Negative Interaction (γ3) Effect, Table 7
Regressions: a) unrestricted; b) weighted by real GDP
OLSDJ
CPFEDJ
CPFE/TEDJ
OLSDF
CPFEDF
CPFE/TEDF
-.13**(.01)
-.11**(.02)
-.11**(.02)
-.12**(.01)
-.10**(.02)
-.10**(.02)
Weighted -.02**(.00)
-.08(.05)
-.08(.04)
-.05**(.00)
-.13**(.05)
-.12**(.04)
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Hard Criticism 4: Using Too Much Data?
Rose: Comments on Ghosh, Qureshi and Tsangarides 14
Restricting to observations with an anchorReduces/Eliminates Interaction
Critical Negative Interaction (γ3) Effect, Table 7
Regressions: a) unrestricted; b) with one anchor
OLSDJ
CPFEDJ
CPFE/TEDJ
OLSDF
CPFEDF
CPFE/TEDF
-.13**(.01)
-.11**(.02)
-.11**(.02)
-.12**(.01)
-.10**(.02)
-.10**(.02)
With an Anchor
-.07**(.01)
+.00(.02)
+.00(.02)
-.06**(.01)
+.03(.03)
+.03(.03)
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Basic Problem of Interpretation• Country can choose a single monetary regime,
but still has many bilateral exchange rates– US$ does not float freely against RMB – But US$ floats freely against €– Policy-induced flexibility is multilateral, not bilateral
• Seems natural to focus on one partner with whom have most significant/explicit arrangements– US floats against €– China manages RMB against US$ (an anchor)– (But … why throw away other bilateral information?)
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Summary of Critique
1. Smaller– Why Use Regimes instead of Variability?– Silly Model of Trade Balance– Empirically Results are Modest
2. Bigger– Inflation Results Worrying: too good– Unimportant observations too important (early years;
GDP-weighting; non-anchor: non-anchor)3. What does it mean?– Country has one monetary policy, many bilateral exchange
ratesRose: Comments on Ghosh, Qureshi and
Tsangarides 16
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What Would I do Differently?
1. Present and discuss these problems2. Argue that they’re not a big deal
Rose: Comments on Ghosh, Qureshi and Tsangarides 17