CEPII, Recherche et Expertise sur l'economie mondiale
Pegging emerging currencies in the face of dollar swings

Virginie Coudert
Cécile Couharde
Valérie Mignon

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 Abstract :
The aim of this paper is to study ruptures of exchange-rate pegs by focusing on the fluctuations of the anchor currency. We test for the hypothesis that currencies linked to the USD are more likely to loosen their peg when the USD is appreciating, while sticking to it otherwise. To this end, we estimate smooth-transition regression models for a sample of 28 emerging currencies over the 1994-2011 period. Our findings show that while the real effective exchange rates of most of these countries tend to co-move with that of the USD in times of depreciation, this relationship is frequently reversed when the US currency appreciates over a certain threshold. Such nonlinear effects are especially at stake in Asia where growth is export-oriented.

 Keywords : real exchange rates | anchor currency | rupture of pegs | smooth transition regression models

 JEL : F31, F33, C22
CEPII Working Paper
N°2012-21, October 2012

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