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Macroeconomic Policies, Bureaucracy and Deregulation: The Choice of the Exchange Rate Regime

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Business Regulation and Public Policy

Part of the book series: International Studies in Entrepreneurship ((ISEN,volume 20))

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Abstract

This chapter examines the contemporaneous relationship between the exchange rate regime and structural economic reforms over a period of 30 years. Using panel data techniques, we look at both a broad (“world sample”) and an OECD country sample. We investigate empirically whether structural reforms are complements or substitutes for monetary commitment in the attempt to improve macroeconomic performance. Our results suggest that, on average, an exchange rate rule positively correlates with the overall structural reforms and trade liberalization in particular. We do not find a significant and robust impact of exchange rate commitment on labor and product market reform, on the other hand. The results are similar for both the wider, more heterogeneous world sample and the panel of OECD economies. They contradict the hypothesis that exchange rate commitments may have slowed down the pace of structural reform, but neither provide robust evidence that losing the possibility of an exchange rate adjustment promotes labor and product market reforms.

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Notes

  1. 1.

    Van Poeck and Borghijs (2001) argue that the prospect of qualifying for EMU should provide as big an incentive for labor-market reform as EMU membership itself. They conclude that EMU countries did not reform more than other countries and, unlike elsewhere, their progress on reform seemed unrelated to the initial level of unemployment. For a period from the early 1990s up to 1999, Bertola and Boeri (2001), they only focus cash transfers to people of working age (unemployment benefits) and on job protection. They arrive at exactly opposite conclusions: reforms accelerated more in the euro area than outside.

    The IMF (2004) looks at the impact of a range of factors including macroeconomic conditions, political institutions, reform design and variables aimed to capture attitudes towards structural reform on different policy areas across OECD countries from the mid-1970s up to the late 1990s. It finds that EU membership leads to faster moves towards liberalization of product markets. However, it does not clarify whether this represents an effect of EMU and/or policies to prepare for EMU. See also Duval and Elmeskov (2005), p. 10.

  2. 2.

    For a survey see Duval and Elmeskov (2005) and Hochreiter and Tavlas (2005).

  3. 3.

    See Bean (1998), Calmfors (1998: 28); Duval and Elmeskov (2005: 5) and Saint-Paul and Bentolila (2000).

  4. 4.

    There is an additional argument speaking against reverse causality. In what way should a supranational variable like exchange rate flexibility be influenced by a national variable as the change in the EFW index at all? As far as at least two parties are necessary to agree upon a peg, this appears to be a good argument in favour of, at least, partial exogeneity of exchange rate policy.

  5. 5.

    It is important to note that the absence of AR(2) is the necessary condition for unbiased and efficient estimation with GMM-DIFF and GMM-SYS, but not of AR(1). First order residual autocorrelation in the starting equation is no problem since both estimators work with first differences. Hence, the significance of AR(1) does not limit the validity of our results.

  6. 6.

    In the case of the 1-step estimators, heteroscedasticity tends to strengthen the bias towards the significance of the Sargan test. Hence, one could readily interpret our results as evidence of heteroscedasticity. However, both estimators (GMM-DIFF and GMM-SYS) use heteroscedasticity-robust standard errors. This should make the estimated coefficients quite robust.

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Acknowledgment

I am grateful for valuable comments from Gulcin Ozkan, University of York, Christoph Müller, University of Hohenheim, John Hudson, University of Bath, Gerrit B. Koester, Deutsche Bundes-bank, and other participants in the conferences “Bürokratieabbau in Europa”, November 11th, 2007, in Magdeburg, Schloss Wendgräben, Germany, organized by the Konrad-Adenauer-Stiftung, in the Conference on “The Travails of the Eurozone”, Money, Macro & Finance Research Group and University Association for Contemporary European Studies, March 24th, 2006, in Edinburgh, and in the 2008 Annual Meeting of the European Public Choice Society (EPCS), Jena. This chapter is based on my talk “Bürokratieabbau in Europa – Ein Reformvergleich in den EU-Mitgliedstaaten” given at the first conference, on my speech about “Monetary Policy as a Driver of Structural Reforms” (Session: “Structural Reform and the Euro”, delivered on the second occasion) and “Macroeconomic Policies, Bureaucracy and Deregulation – The Choice of the Exchange Rate Regime” (Session: “Money II”, delivered on the third occasion). The usual caveats apply.

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Authors and Affiliations

  1. University of Duisburg-Essen, and IZA, Bonn, Germany

    Ansgar Belke

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  1. Ansgar Belke
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Correspondence to Ansgar Belke .

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Editors and Affiliations

  1. Panteia B.V., Zoetermeer, 2701 AA, Netherlands

    André Nijsen

  2. Dept. of Economics, University of Bath, Claverton Down, Bath, BA2 7AY, United Kingdom

    John Hudson

  3. Inst. Betriebswirtschaftslehre, LS Entrepreneurship, Univ. Hohenheim, Schloß Osthof-Nord, Stuttgart, 70593, Germany

    Christoph Müller

  4. Fac. Social Sciences, Erasmus University, Rotterdam, 3000 DR, Netherlands

    Kees Paridon

  5. CASBEC Room H8-24, Erasmus University Rotterdam, P.O. Box 1738, Rotterdam, 3000 DR, Netherlands

    R. Thurik

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Belke, A. (2009). Macroeconomic Policies, Bureaucracy and Deregulation: The Choice of the Exchange Rate Regime. In: Nijsen, A., Hudson, J., Müller, C., Paridon, K., Thurik, R. (eds) Business Regulation and Public Policy. International Studies in Entrepreneurship, vol 20. Springer, New York, NY. https://doi.org/10.1007/978-0-387-77678-1_17

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