How Reliable are De Facto Exchange Rate Regime Classifications?
Barry Eichengreen, Raul Razo-Garcia
NBER Working Paper No. 17318
We analyze disagreements over de facto exchange-rate-regime classifications using three popular de facto regime data series. While there is a moderate degree of concurrence across classifications, disagreements are not uncommon, and they are not random. They are most prevalent in middle-income countries (emerging markets) and low-income (developing) countries as opposed to advanced economies. They are most prevalent for countries with well-developed financial markets, low reserves and open capital accounts. This suggests caution when attempting to relate the exchange rate regime to financial development, the openness of the financial account, and reserve management and accumulation decisions.
They do not cite this paper by Guisinger and Singer, which they should. Nor do they include the Aizenmann-Chinn-Ito "trilemma indexes" in the analysis, which they probably should. Still potentially interesting for those who do quantitative work involving exchange rates.
Country Size, International Trade, and Aggregate Fluctuations in Granular Economies
Julian di Giovanni, Andrei A. Levchenko
NBER Working Paper No. 17335
This paper proposes a new mechanism by which country size and international trade affect macroeconomic volatility. We study a multi-country, multi-sector model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks. When the distribution of firm sizes follows a power law with an exponent close to -1, the idiosyncratic shocks to large firms have an impact on aggregate output volatility. We explore the quantitative properties of the model calibrated to data for the 50 largest economies in the world. Smaller countries have fewer firms, and thus higher volatility. The model performs well in matching this pattern both qualitatively and quantitatively: the rate at which macroeconomic volatility decreases in country size in the model is very close to what is found in the data. Opening to trade increases the importance of large firms to the economy, thus raising macroeconomic volatility. Our simulation exercise shows that the contribution of trade to aggregate fluctuations depends strongly on country size: in the largest economies in the world, such as the U.S. or Japan, international trade increases volatility by only 1.5-3.5%. By contrast, trade increases aggregate volatility by some 15-20% in a small open economy, such as Denmark or Romania.
Does this contradict the PSST story in the case of the stagnating US economy?