Discussion of Friedman Redux … by

Ghosh, Qureshi and TsangaridesAndrew 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

2Rose: Comments on Ghosh, Qureshi and Tsangarides

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 useRegime 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: IncompleteModel 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?

Rose: Comments on Ghosh, Qureshi and Tsangarides 11

Shouldn’t high inflation make nominal exchange rate regime irrelevant?

Critical Negative Interaction (γ3) Effect, Table 7

Country-pairs: a) unrestricted; both with b) moderate; or c) high inflation

Inflation Obs OLSDJ

CPFEDJ

CPFE/TEDJ

OLSDF

CPFEDF

CPFE/TEDF

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)

Hard Criticism 2:Sensitivity over Time?

Rose: Comments on Ghosh, Qureshi and Tsangarides 12

Is exact sample period relevant?

Critical Negative Interaction (γ3) Effect, Table 7

Inflation Obs OLSDJ

CPFEDJ

CPFE/TEDJ

OLSDF

CPFEDF

CPFE/TEDF

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)

Hard Criticism 3: AreAll Observations Equal?

Rose: Comments on Ghosh, Qureshi and Tsangarides 13

Weighting by GDP eliminates De Jure ResultSmaller Effect on (more important) De Facto

Critical Negative Interaction (γ3) Effect, Table 7

Regressions: a) unrestricted; b) weighted by real GDP

OLSDJ

CPFEDJ

CPFE/TEDJ

OLSDF

CPFEDF

CPFE/TEDF

-.13**(.01)

-.11**(.02)

-.11**(.02)

-.12**(.01)

-.10**(.02)

-.10**(.02)

Weighted -.02**(.00)

-.08(.05)

-.08(.04)

-.05**(.00)

-.13**(.05)

-.12**(.04)

Hard Criticism 4: Using Too Much Data?

Rose: Comments on Ghosh, Qureshi and Tsangarides 14

Restricting to observations with an anchorReduces/Eliminates Interaction

Critical Negative Interaction (γ3) Effect, Table 7

Regressions: a) unrestricted; b) with one anchor

OLSDJ

CPFEDJ

CPFE/TEDJ

OLSDF

CPFEDF

CPFE/TEDF

-.13**(.01)

-.11**(.02)

-.11**(.02)

-.12**(.01)

-.10**(.02)

-.10**(.02)

With an Anchor

-.07**(.01)

+.00(.02)

+.00(.02)

-.06**(.01)

+.03(.03)

+.03(.03)

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

ratesRose: Comments on Ghosh, Qureshi and

Tsangarides 16

What Would I do Differently?

1. Present and discuss these problems2. Argue that they’re not a big deal

Rose: Comments on Ghosh, Qureshi and Tsangarides 17