Resumen. Este artículo estudia la credibilidad del régimen cambiario de bandas de fluctuación crecientes a tasa constante de Venezuela durante el periodo julio de 1996-febrero de 2002. Mostramos que los análisis de credibilidad aplicados a zonas objetivo, introduciendo algunas modificaciones, también pueden utilizarse para estudiar la credibilidad de sistemas cambiarios de bandas de fluctuación crecientes a tasa constante. En este trabajo aplicamos tanto el denominado test de credibilidad de Svensson como el método de ajuste de la deriva. Con ambos métodos obtenemos resultados similares en cuanto al alto grado de credibilidad del sistema durante el periodo analizado.
Palabras clave: sistema cambiario de bandas de fluctuación crecientes a tasa constante, credibilidad, realineamientos.
Clasificación JEL: F31, F33.
Abstract. This paper studies the credibility of the Venezuela crawling-band exchange rate regime during the period July, 1996-February, 2002. We show that, introducing some modifications, the credibility analysis widely applied to target zone regimes can also be used in studying the credibility of crawling-band regimes. In analyzing the credibility of the Venezuela crawling band, first we use the so-called simple credibility tests developed by Svensson (1991). Additionally, we estimate the expected rate of realignment using the drift-adjustment method. Both the credibility tests and the drift-adjustment method give similar results, showing that the crawling-band system was highly credible during the period.
Key words: crawling-band exchange rate system, credibility, realignments.
JEL classification: F31, F33.
This paper studies the credibility of the crawling-band exchange rate system implemented by the Central Bank of Venezuela during the period 1996-2002. Following Williamson (1996), an exchange rate crawling-band can be defined as a system in which the exchange rate is forced to move inside a band with the band being adjusted in small steps aiming to keeping it in line with the fundamentals. As in a target zone system, the monetary authority intervenes when the exchange rate reaches the limits of the band. Therefore, a crawling-band system is similar to a target zone except for the fact that central parity is not constant over time but increases at a constant positive rate (the crawl rate). Both the bandwidth and the crawl rate are preannounced.
As pointed out by Williamson (1996), the principal cause of changes in the exchange rate parity (the crawl) is typically the inflation differential, to ensure that high domestic inflation does not lead to a progressive erosion in international competitiveness. The purpose of making parity changes in relatively small steps is to avoid creating situations where the market is able to profit through correct anticipation of an impending parity change. This exchange rate system has been adopted by developing countries experiencing high inflation. Examples are Chile, Colombia, Israel, Indonesia, Ecuador, Russia and Venezuela, with bandwidths ranging from the [+ or -] 5.5 percent of Ecuador to the [+ or -] 15percent of Chile and Russia.
During the period July 8, 1996-February 8, 2002, Venezuela adopted a crawling-band system, rate with a bandwidth of [+ or -] 7.5 percent and an initial crawl rate of 1.5 percent by month, to stabilize the exchange rate. During this period, the exchange rate central parity was readjusted several times, besides the crawl, implying both revaluations and devaluations (four revaluations and one small devaluation at the end of the period).
The purpose of this paper is two-fold: first, we show that credibility analysis, widely applied to target zones, can be applied to crawling bands after minor changes in order to take into account the fact that in the latter regimes central parity is not constant but increases continuously over time. Second, we investigate the credibility of the crawling-band system adopted recently by Venezuela.
In the empirical analysis, we first study the credibility of the crawling-band exchange rate system adopted by Venezuela using the so-called simple credibility tests. Svensson (1991) developed a set of simple credibility tests for target zones. By computing the rate of return band, we can see whether domestic interest rates are inside this band. By adding the assumption of uncovered interest parity, we can calculate the maximum and minimum expected rate of depreciation.
Second, we use a more precise method to estimate the expected rates of devaluation (revaluation). Bertola and Svensson (1993) developed the so-called drift adjustment method to estimate the probability of realignments. The idea involves extracting devaluation expectations by adjusting interest rate differentials for expected rates of depreciation within the band. This method has been used, among others, by Rose and Svensson (1995), Bertola and Svensson (1993), and Lindberg, Soderlind and Svensson (1993) to analyze ERM and Swedish devaluation risk.
Our empirical results are highly suggestive of the credibility of the Venezuela crawling-band regime. Simple credibility tests show that the system was not credible over some short periods, indicating the existence of expectations of both revaluation and devaluation. We find expectations of revaluation just before the first and fourth realignments (revaluations). On the other hand, these tests indicate the existence of expectations of devaluation at the end of the period, just before the fifth realignment (in fact, a devaluation). Nevertheless, the simple credibility tests seem to indicate that the regime was credible most of the time. Second, the drift adjustment method gives a more precise estimate about expectations of realignment, indicating that the regime was highly stable, with a probability of realignment not significantly different from zero over most of the period. Moreover, our estimate can predict all the realignments, and their sign, during the existence of the crawling-band system. In general, the results obtained show that the regime was highly credible and successful in managing the exchange rate.
The rest of the paper is as follows: the main characteristics of the Venezuela crawling-band system experience are discussed in Section 2. Section 3 presents the simple credibility tests and their results in the case of Venezuela. Section 4 presents the results of the estimation of the expected rate of realignment using...