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Searching for credible exchange rate regimes in the former Soviet Union

  • Exchange Rate Policy
  • Published:
Intereconomics

Abstract

Two macroeconomic constraints determine the credibility of an exchange rate system: the availability of foreign exchange and the sustainability of fiscal balance. The following paper analyses the relative importance of these constraints for fixed and flexible exchange rate systems, examines the progress of reforms to relax these constraints in Estonia and Russia and draws conclusions for the choice of an exchange rate system for other countries of the former Soviet Union.

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References

  1. Cf. Rainer Schweickert: Alternative Strategies for Real Devaluation and the Sequencing of Economic Reforms in Developing Countries, in: Kyklos, Vol. 46, 1993, pp. 65–85; Rainer Schweickert: Stabilization and Real Adjustment in Emerging Market Economies—What Can be Learned from Macroeconomic Reforms in the Southern Cone? in: INTERECONOMICS, Vol. 29, 1994, pp. 244–252. For the discussion of the underlying Dornbusch/Corden type model, cf. Rainer Schweickert: Implikationen alternativer geldund wechselkurspolitischer Regeln im Transformationsprozeß, in: Kredit & Kapital, Vol. 26, No. 2, 1993, pp. 205–229.

  2. Cf. Lucian Orlowski: The disintegration of the ruble zone: driving forces and proposals for policy change, in: Außenwirtschaft, Vol. 49, 1994, pp. 101–129.

  3. For the discussion of the exchange rate policies of Belarus and the Ukraine, cf. Rainer Schweickert: Currency Reforms in the Former Societ Union (FSU)—on the Importance of Macroeconomic Constraints, Kiel Institute of World Economics, Kiel Working Papers, No. 670, Kiel 1995.

  4. For details, cf. Claudia M. Buch, Michael J. Koop, Rainer Schweickert, Hartmut Wolf: Währungsreformen im Vergleich: Analyse und Bewertung monetärer Strategien in Rußland, Weißrußland, der Ukraine und Estland, Kiel Studies, 270, Tübingen 1995, forthcoming.

  5. For details of the Estonian Currency Board, cf. e.g. Adam G. G. Bennett: The Operation of the Estonian Currency Board, in: IMF Staff Papers, Vol. 40, 1993, pp. 451–470; Seija Leinela: Currency Reforms in the Baltic States, in: Communist Economies and Economic Transformation, Vol. 5, 1993, pp. 427–443.

  6. Cf. Peter Bofinger: Options for the Payments and Exchange Rate System in Eastern Europe, in: CEPR, Discussion Paper Series, No. 545, London 1991; Volker Hofmann, Friedrich L. Sell: Credibility, Currency Convertibility and the Stabilisation of the Rouble, in: INTERECONOMICS, Vol. 28, No. 1, 1993, pp. 11–16; Holger Schmieding: Comment on: Peter Bofinger, Erik Swindland, Benedikt Thanner: Prospects for the Monetary Order in the Republics of the FSU, in: CEPR, The Economics of New Currencies, London 1993, pp. 34–51.

  7. Roland Vaubel: Die Währungsordnung im Transformationsprozeß, in: Carsten Herrmann-Pillath (ed.): Marktwirtschaft als Aufgabe, Stuttgart, 1994, pp. 561–573.

  8. Additionally, the monetary base is fully covered by foreign exchange. For the functioning of currency boards, cf. Steve H. Hanke, Kurt Schuler: Currency Boards and Currency Convertibility, in: The Cato Journal, Vol. 12, 1993, pp. 687–705.

  9. Cf. Rolf Langhammer: Designing New Trade Policies for the CIS States. Legacies, Barriers and Prerequisites, in: Kiel Working Papers, No. 625, Kiel 1994.

  10. Furthermore, lack of credibility could lead importers to hoard goods, thus aggravating the trade deficit.

  11. Cf. Roland Vaubel: op. cit. Die Währungsordnung im Transformationsprozeß, in: Carsten Herrmann-Pillath (ed.): Marktwirtschaft als Aufgabe, Stuttgart 1994, pp. 561–573.

  12. Cf. John Williamson: A Cost-Benefit Analysis of Capital Account Liberalisation, in: Helmut Reisen, Bernhard Fischer (eds.): Financial Opening. Policy Issues and Experiences in Developing Countries, OECD, Paris 1993, pp. 25–34, for a list of recommendations in this respect.

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  14. Cf. Economic Intelligence Unit (EIU): Country Report. Baltic Republics: Estonia, Latvia, Lithuania 1994, No. 1-No. 3; Klaus Schrader: Estland auf dem Weg zur Marktwirtschaft: Eine Zwischenbilanz, in: Kiel Discussion Papers, No. 226, Kiel 1994.

  15. Cf. Rainer Schweickert: Exchange Rate Based Stabilization—Lessons from a Radical Implementation in Argentina, in: The World Economy, Vol. 17, 1994, pp. 171–189; Pablo E. Guidotti, Carlos A. Végh: Losing Credibility: the Stabilization Blues, IMF Working Paper, WP/92/73, Washington, D.C. 1992.

  16. Cf. Rolf Langhammer, op. cit. Designing New Trade Policies for the CIS States. Legacies, Barriers and Prerequisites, in: Kiel Working Papers, No. 625, Kiel 1994.; Deutsches Institut für Wirtschaftsforschung, Institut für Weltwirtschaft, Institut für Wirtschaftsforschung (DIW/IfW/IWH): Die wirtschaftliche Lage Rußlands—Fortsetzung des Niedergangs ohne hinreichenden Strukturwandel, in: Kiel Discussion Papers, Nos. 240/241, Kiel 1994.

  17. Cf. Peter Nunnenkamp, Rainer Schweickert: Determinanten der Kreditvergabe von Privatbanken an Entwicklungsländer in den achtziger Jahren, in: Die Weltwirtschaft, No. 1, 1989, pp. 152–171; Norbert Funke, Peter Nunnenkamp, Rainer Schweickert: Brazil: Another Lost Decade?—Domestic Policies and Attractiveness for Foreign Capital, in: Kiel Discussion Papers, No. 188, Kiel 1992.

  18. The latter strategy was successfully implemented in Chile in the 1980s; cf. Rainer Schweickert: Stabilization and Real Adjustment …, op. cit. Stabilization and Real Adjustment in Emerging Market Economies—What Can be Learned from Macroeconomic Reforms in the Southern Cone? in: INTERECONOMICS, Vol. 29, 1994, pp. 244–252. For the discussion of the underlying Dornbusch/Corden type model.

  19. Due to the Laffer curve effect, this does not hold for very high inflation rates because in such a situation the increase in money demand is likely to compensate for the decreasing tax rate; cf. Rudiger Dornbusch, Stanley Fischer: Macroeconomics, 5th edition, Singapore 1990.

  20. Cf. Athar Hussain, Nicholas H. Stern: The Role of the State, Ownership and Taxation in Transitional Economies, in: The Economics of Transition, Vol. 1, 1993, pp. 61–87.

  21. Cf. Economic Intelligence Unit (EIU), op. cit. Country Report. Baltic Republics: Estonia, Latvia, Lithuania 1994, No. 1-No. 3; Klaus Schrader, op. cit. Country Report. Baltic Republics: Estonia, Latvia, Lithuania 1994, No. 1-No. 3

  22. Deutsches Institut für Wirtschaftsforschung, Institut für Weltwirtschaft, Institut für Wirtschaftsforschung (DIW/IfW/IWH): Die wirtschaftliche Lage Rußlands—Beschleunigte Talfahrt durch verschleppte Reformen, in: Kiel Discussion Papers, No. 232, Kiel 1994; Deutsches Institut für Wirtschaftsforschung, Institut für Weltwirtschaft, Institut für Wirtschaftsforschung (DIW/IfW/IWH): Die wirtschaftliche Lage Rußlands—Fortsetzung des Niedergangs …, op. cit. in: Kiel Discussion Papers, No. 232, Kiel 1994.

  23. Cf. Ronald I. McKinnon: Stabilizing the Ruble: The Problem of Internal Currency Convertibility, in: Emil-Maria Claassen (ed.): Exchange Rate Policies in Developing and Post-Socialist Countries, International Center for Economic Growth, San Francisco 1991, pp. 59–87.

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  24. Cf. e.g. Vittorio Corbo, Jaime de Melo, James Tybout: What Went Wrong with the Recent Reforms in the Southern Cone, in: Economic Development and Cultural Change, Vol. 34, 1986, pp. 607–640.

  25. Cf. John Williamson: Advice on the Choice of Exchange Rate Policy, in: Emil-Maria Claassen, op. cit.,, pp. 395–403.

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  1. Institute of World Economics, Kiel, Germany

    Rainer Schweickert

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Schweickert, R. Searching for credible exchange rate regimes in the former Soviet Union. Intereconomics 30, 126–132 (1995). https://doi.org/10.1007/BF02927267

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