20220224-IMF-Fix_vs._Float_Evaluating_the_Transition_to_a_Sustainable_Equilibrium_in_Bolivia_32页_3mb

Fix vs. Float: Evaluating the Transition to a Sustainable Equilibrium in Bolivia

I. Bolivia's Current Trajectory

• Since 2014, Bolivia has faced fiscal deficits widening from 3.4% to 8.1% of GDP in 2018, despite slight improvements to 7.2% in 2019. This reduction in fiscal balance has been accompanied by external sector deterioration, a 34% real effective exchange rate appreciation, and a decline in international reserves from $15.1 billion (45.5% of GDP) to $4.7 billion (12.2% of GDP) by August 2021.

II. Systemic Considerations

• There are limited theoretical grounds to favor one exchange rate regime over another in nature.
• Theory suggests pegs can support price stability and fiscal policy credibility, while flexibles can enhance macroeconomic adjustment capacity.

III. Model Overview

• A DSGE model is employed to assess the long-run implications of fixed vs. inflation-targeting (IT) exchange regimes for Bolivia.
• The model incorporates standard features such as price and wage rigidities, financial accelerator, and Ricardian/non-Ricardian agents.

IV. Key Findings

• A sustainable deficit/steady state is available in both regimes, but with slightly different fiscal requirements (primary deficit of -1.9% under IT vs. -1.5% under peg).
• IT yields higher seignorage revenues due to greater inflation averaging 4.0% vs. 2.0%, which increases fiscal flexibility.
• Transition paths suggest that entirely eliminating the fiscal deficit is critical, typically requiring several years to stabilize public debt.

V. Transition Dynamics

• Successful transitions to sustainability rely heavily on the credibility of announced fiscal and monetary programs.
• Under a peg, fiscal discipline is crucial due to vulnerability to speculative attacks.
• Preannounced time-consistent fiscal programs are essential to support credibility.

VI. Model with Regime Switching

• Explicitly modeling announced future regime shifts (peg to IT) produces transitions that are smoother with welfare benefits.
• The pegged regime is shown to be self-reinforcing earlier in time-consistent paths.

VII. Comparative Analysis

• A simulated risk-off shock – a sudden increase in risk premiums in 2013-like style – shows substantial benefits for IT in terms of preserving reserves and real GDP.
• Both regimes showed marked differences only in the presence of shocks, IT cushioning the impact through depreciation.

VIII. Avenues for Further Modeling

• The study acknowledges a lack of explicit modeling of informal capital controls and communication/synchronization effects of business cycles.
• It stresses the need for further endogeneity in modeling fiscal credibility and country-specific capital market constraints.

IX. Conclusion

• Either exchange rate regime yields comparable outcomes under stable conditions, though IT moderately boosts welfare by offering greater adjustment flexibility.
• The case for maintaining the peg depends on fiscal credibility; otherwise, transition to IT is preferable to avoid welfare erosion during negative shocks and maintain international credit ratings.