Discussion of Friedman Redux … by Ghosh, Qureshi and Tsangarides

1. Discussion of Friedman Redux … byGhosh, Qureshi and Tsangarides Andrew K. Rose Berkeley-Haas, NBER and CEPR

2. 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

3. 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 getstrong bilateral results • Easy to replicate (with their data) Rose: Comments on Ghosh, Qureshi and Tsangarides

4. 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

5. 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

6. 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

7. Smaller Criticisms: 2 • “Multilateral” better than “aggregate” • A good graph here would beat pages of regression coefficients Rose: Comments on Ghosh, Qureshi and Tsangarides

8. 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

9. 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

10. 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

11. Hard Criticism 1: Does the Effect Work too Well? 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 Rose: Comments on Ghosh, Qureshi and Tsangarides

12. Hard Criticism 2:Sensitivity over Time? Is exact sample period relevant? Critical Negative Interaction (γ3) Effect, Table 7 Rose: Comments on Ghosh, Qureshi and Tsangarides

13. Hard Criticism 3: AreAll Observations Equal? Weighting by GDP eliminates De Jure Result Smaller Effect on (more important) De Facto Critical Negative Interaction (γ3) Effect, Table 7 Regressions: a) unrestricted; b) weighted by real GDP Rose: Comments on Ghosh, Qureshi and Tsangarides

14. Hard Criticism 4: Using Too Much Data? Restricting to observations with an anchor Reduces/Eliminates Interaction Critical Negative Interaction (γ3) Effect, Table 7 Regressions: a) unrestricted; b) with one anchor Rose: Comments on Ghosh, Qureshi and Tsangarides

15. 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

16. Summary of Critique • Smaller • Why Use Regimes instead of Variability? • Silly Model of Trade Balance • Empirically Results are Modest • Bigger • Inflation Results Worrying: toogood • Unimportant observations too important (early years; GDP-weighting; non-anchor: non-anchor) • What does it mean? • Country has one monetary policy, many bilateral exchange rates Rose: Comments on Ghosh, Qureshi and Tsangarides

17. What Would I do Differently? • Present and discuss these problems • Argue that they’re not a big deal Rose: Comments on Ghosh, Qureshi and Tsangarides