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Discussion of Friedman Redux … by Ghosh, Qureshi and Tsangarides Andrew K. Rose Berkeley-Haas, NBER and CEPR 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 Rose: Comments on Ghosh, Qureshi and Tsangarides 2 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) Rose: Comments on Ghosh, Qureshi and Tsangarides 3 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) Rose: Comments on Ghosh, Qureshi and Tsangarides 4 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) Rose: Comments on Ghosh, Qureshi and Tsangarides 5 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) Rose: Comments on Ghosh, Qureshi and Tsangarides 6 Smaller Criticisms: 2 • “Multilateral” better than “aggregate” • A good graph here would beat pages of regression coefficients Rose: Comments on Ghosh, Qureshi and Tsangarides 7 Soft Criticism 1: Why use Regime 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 Rose: Comments on Ghosh, Qureshi and Tsangarides 8 Soft Criticism 2: Incomplete Model 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)? Rose: Comments on Ghosh, Qureshi and Tsangarides 9 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 Rose: Comments on Ghosh, Qureshi and Tsangarides 10 Hard Criticism 1: Does the Effect Work too Well? Shouldn’t high inflation make nominal exchange rate regime irrelevant? Obs OLS DJ CPFE DJ CPFE/TE DJ OLS DF CPFE DF CPFE/TE DF 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) Inflation Critical Negative Interaction (γ3) Effect, Table 7 Country-pairs: a) unrestricted; both with b) moderate; or c) high inflation Rose: Comments on Ghosh, Qureshi and Tsangarides 11 Hard Criticism 2: Sensitivity over Time? Is exact sample period relevant? Obs OLS DJ CPFE DJ CPFE/TE DJ OLS DF CPFE DF CPFE/TE DF 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) Inflation Critical Negative Interaction (γ3) Effect, Table 7 Rose: Comments on Ghosh, Qureshi and Tsangarides 12 Hard Criticism 3: Are All Observations Equal? Weighting by GDP eliminates De Jure Result Smaller Effect on (more important) De Facto Weighted OLS DJ CPFE DJ CPFE/TE DJ OLS DF CPFE DF CPFE/TE DF -.13** (.01) -.11** (.02) -.11** (.02) -.12** (.01) -.10** (.02) -.10** (.02) -.02** (.00) -.08 (.05) -.08 (.04) -.05** (.00) -.13** (.05) -.12** (.04) Critical Negative Interaction (γ3) Effect, Table 7 Regressions: a) unrestricted; b) weighted by real GDP Rose: Comments on Ghosh, Qureshi and Tsangarides 13 Hard Criticism 4: Using Too Much Data? Restricting to observations with an anchor Reduces/Eliminates Interaction With an Anchor OLS DJ CPFE DJ CPFE/TE DJ OLS DF CPFE DF CPFE/TE DF -.13** (.01) -.11** (.02) -.11** (.02) -.12** (.01) -.10** (.02) -.10** (.02) -.07** (.01) +.00 (.02) +.00 (.02) -.06** (.01) +.03 (.03) +.03 (.03) Critical Negative Interaction (γ3) Effect, Table 7 Regressions: a) unrestricted; b) with one anchor Rose: Comments on Ghosh, Qureshi and Tsangarides 14 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?) Rose: Comments on Ghosh, Qureshi and Tsangarides 15 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 rates Rose: Comments on Ghosh, Qureshi and Tsangarides 16 What Would I do Differently? 1. Present and discuss these problems 2. Argue that they’re not a big deal Rose: Comments on Ghosh, Qureshi and Tsangarides 17