Declining commodity prices during mid-2014-2016 posed significant challenges to commodity-exporting economies. The severe terms of trade shock associated with a sharp fall in world commodity prices have raised anew questions about the viability of pegged exchange rate regimes. More recently, the COVID-19 pandemic and the measures needed to contain its spread have been associated with a significant disruption in several economic sectors, in particular, travel, tourism, and hospitality industry, adding to the downward pressure on commodity prices, a sharp fall in foreign exchange earnings, and depressed economic activity in most commodity exporters. This paper reviews country experiences with different exchange rate regimes in coping with commodity price shocks and explores the role of flexible exchange rates as a shock absorber, analyzing the macroeconomic impact of adverse term-of-trade shocks under different regimes using event study and panel vector autoregression techniques. It also analyzes, conceptually and empirically, policy and technical considerations in making exchange rate regime choices and discusses the supporting policies that should accompany a given regime choice to make that choice sustainable. It offers lessons that could be helpful to the Caribbean commodity-exporters.
Greater Flexibility Through More Flexible Pegged Regimes
II. Data Descriptions and Sources for the Choice of Exchange Rate Regimes
III. Sample of Countries that Switched Exchange Rate Regimes; 2013–2017
The authors are grateful for guidance and suggestions from Aasim Husain and Alejandro Werner. Input and contributions from Marcos Chamon, Thomas Dowling, Oscar Hendrick, Marie Kim, and Lulu Shui at the initial stages of this project, and helpful comments from Marco Arena, Hussein Bidawi
(such as inflation targeting) could eventually replace the exchange rate as a nominal anchor. But establishing these foundations takes time and require extensive capacity-building, suggesting to start with those elements that help overcome the fear of floating and that take longer time to build.
Appendix I: CommodityTerms-of-TradeIndex
For each country, the change in the commodity ToT index (CTT) corresponds to the weighted sum of annual variations in global prices of commodities, weighted by the country’s net exports of each commodity as a share of GDP