SSRN Id3545977

WORKING PAPER
URL: www.bit.ly/2vqLif4
DOI: 10.13140/RG.2.2.29163.49444
COMPARISON OF EFFECTS OF RECLASSIFICATION OF

EXCHANGE RATE REGIME BETWEEN POLAND AND INDONESIA
Sudeshna Saha, Nivedita Mandal, Rituparna Das*
Abstract
This paper analyses the impact of the reclassification of the exchange rate regimes on the
emerging economies. The factors that are taken into consideration are the economic growth,
financial stability, inflation, trade and investment. To compare between the two phases a
paired t-test was conducted which gave a mixed conclusion for different factors. It was seen
that the reclassification was beneficial for some factors whereas in some cases it resulted in
its decline.
Key Words
Emerging economies, Exchange rate regimes, Reclassification, Economic growth,, Financial
stability, Inflation, Trade, Investment.
JEL
B17
*Corresponding Author <dr.rituparnadas@outlook.com>
Electronic copy available at: https://ssrn.com/abstract=3545977

1. INTRODUCTION
1.1 EXCHANGE RATE:
According to World Bank, “official exchange rate refers to the exchange rate determined by national
authorities or the rate determined in the legally sanctioned exchange market. It is calculated as an
annual average based on monthly averages (local currency units relative to U.S. Dollar)”.
According to IMF, “The real exchange rate (RER) between two currencies is the product of the
nominal exchange rate (the dollar cost of a euro, for example) and the ratio of prices between the two
countries.”
An exchange rate between two currencies is the rate at which one currency will be exchanged for
another. It is also regarded as the value of one country’s currency in terms of another country.
An exchange-rate regime is the way an authority manages its currency in relation to other currencies
and the foreign exchange market. There are two major regime types: fixed (or pegged) exchange
rate regimes, where the currency is tied to another currency, mostly reserve currencies such as
the U.S. dollar or the euro or a basket of currencies; floating (or flexible) exchange rate regimes,
where the economy dictates movements in the exchange rate. However, the distinctions between fixed
and floating exchange rate regimes are not so cut and dried. Thus, there are also intermediate
exchange rate regimes.
1.2 EXCHANGE RATE SYSTEM:
We shall look into the international monetary system and the evolution of exchange rate to its current
state. The following line shows the trend of the exchange rate since 1870’s:

1.3 MAJOR EXCHANGE RATE REGIMES :
IMF used to classify exchange rate regimes according to official government statements (de jure
classification). Currently there are certain regimes that are followed by certain countries. They are
listed as follows;
1. Parallel exchange rate : Parallel foreign exchange systems are those in which a market-
determined exchange rate, typically applying to financial transactions but often to a portion of
trade transactions as well, co-exists with one or more pegged exchange rates. Parallel
exchange rate markets the norm in Europe in the 40’s and 50’s. These are common in less
developed countries. It is considered as the barometer of monetary policy i.e. monetary policy
is too loose to maintain peg, parallel rate will start depreciating. It is found to still prevail in
Nigeria and other developing countries.
2. Free Floating exchange rate: A floating exchange rate is a regime where the currency price of
a nation is set by the forex market based on supply and demand relative to other currencies.
Under the floating system, small economies are often subject to wild exchange rate swings
due to a large influx and outflow of surplus money caused by monetary easing. Industrialized
nations such as Japan, the U.S. and many European countries, use the floating system.
3. Fixed exchange rate: A fixed exchange rate is a regime applied by a government or central
bank ties the country's currency official exchange rate to another country's currency or the
price of gold. The purpose of a fixed exchange rate system is to keep a currency's value
within a narrow band. From the end of World War II until around 1971, most currencies were
in some form pegged (or fixed) to the U.S. dollar, which was itself fixed to gold. Fixed
currencies derive value by being fixed (or pegged) to another currency. UAE, Saudi Arbia,
Qatar, etc are some countries which have a pegged currency system.
4. Managed Float exchange rate: Managed float regime is the current international financial
environment in which exchange rates fluctuate from day to day, but central banks attempt to
influence their countries' exchange rates by buying and selling currencies to maintain a certain
range. More countries are adopting a managed floating exchange rate system, especially as a
number of emerging countries try to safeguard their currencies from increased volatility in
foreign exchange markets triggered by monetary easing measures from advanced countries.
The managed floating system is equivalent to a middle ground between the floating system
and the fixed system. China has adopted the managed floating mechanism, thereby limiting its
currency moves to a certain range. In 2012, Georgia, Papua New Guinea and several other

countries switched to the managed floating system from the floating one. The IMF effectively
categorizes Argentina under the managed floating system as it has conducted heavy currency
interventions in recent years.
1.4 EVOLUTION OF EXCHANGE RATE:
THE FIRST PHASE: BIMETALLISM (1870-1875)
In this phase both the gold and silver were used as a money and was accepted as means of payment.
Some countries were on silver standard while some were on silver standard and some on both. Here
exchange rates were determined by either. The silver coin was used by China, Great Britain, USA
including India. These rates were determined by their gold and silver contents. This phase intended to
increase money supply, stabilize prices.
THE CLASSICAL GOLD STANDARD (1875-1914)
During these periods in most major countries’ gold was assured of unrestricted coinage and could be
freely exported or imported. Many countries set a par value for its currency in terms of Gold and tried
to maintain it. Dollar pegged to gold at USD 30 = 1 ounce of gold. The exchange rate became highly
stable and thus provided an environment that was conducive to international trade and investment.
The gold standard prevented a country from printing too much money.
WORLD WAR PERIOD (1915-1944)
The outbreak of World War 1 suspended the operation of Gold Standard. By the end of 1913, the
classical gold standard was at its peak, but World War 1 caused many countries to suspend and
abandon it. During World War 1 currencies fluctuate over wide ranges to gold. Only US and Britain
allowed to hold gold reserves. The US did not suspend the gold standard during the war. Germany had
gone off the gold standard in 1914 and could not effectively return to it because War reparations had
cost it much of its gold reserve. The newly created Federal Reserve intervened in currency markets
and sold bonds to sterilize some of the gold imports that would have otherwise increased the stock of
money. By 1927, many countries had returned to the gold standard. As a result of World War 1 the
US, which had been a net debtor country had become a net creditor country by 1919.

BRETTON WOODS SYSTEM (1945-1972)
This was named for a 1944 meeting of 44 nations at Bretton Woods, New Hempshire, during World
War II to make financial arrangements for the post war world after the expected defeat of Germany
and Japan. The goal was exchange rate stability without the gold standard. The USD was pegged to
gold at $35 per ounce and other currencies were pegged to the USD. Each country was responsible for
maintaining its exchange rate within % of the adopted par value by buying or selling foreign
reserves as necessary. The Bretton Woods system was a dollar-based gold exchange standard. The
things that were to be avoided included rigidity of exchange rates and associated deflationary
adjustment mechanism of the gold standard, the instability of the freely floating exchange rates,
conflicts of national economic policies, competitive exchange depreciation and the repressive and
distorting techniques of exchange controls. The member country on joining was to pay 25 percent of
its quota in gold and remainder in its own currency. The member country could borrow 25 percent of
its quota in one year upto a total of 125 percent of its quota over a period of 5 years. The first 25
percent of its quota, called gold tranche, could be borrowed almost automatically without any
restriction or condition.
In the event, the USA continued to run bigger and bigger deficits while its gold assets remained
constant. It was just a matter of time when the foreign holders of dollars, including central banks,
doubted the ability of the United States to maintain the price of gold at $ 35 per ounce and rushed to
convert dollars into gold before the dollar was devalued. This phenomenon was termed as the
‘confidence problem’. It was argued that the Bretton Woods System gave rise to the seigniorage of
the United States over other countries, since dollar became the international reserve currency that
conferred some undue privilege upon the Americans. Richard Nixon’s decision to suspend
convertibility of dollars into gold was one of the most important chapters in modern economic history.
Spending on the Vietnam War and Great Society as well as the revival of the Western Europe and
Japan led to a decline in the US balance of payments. This placed a significant pressure on the dollar.
Nixon decision to suspend the convertibility of USD into gold was a plan to combat inflation,
effectively ended the Bretton Woods monetary regime and brought about a system of floating
exchange rate within a few years. Since dollar no longer had to be backed by gold, the end of the
Bretton Woods fixed exchange rate system increased the freedom of the US Federal Reserve to
engage in counter cyclical monetary policy.

FLEXIBLE EXCHANGE RATE (1973- Present)
Flexible exchange rates were declared acceptance to the IMF members i.e central banks were allowed
to intervene in the exchange rate markets. Gold was abandoned as an international reserve asset. The
less developed countries were given greater access to IMF funds and World Bank. The current
Exchange rate includes countries with free float (48 countries), managed float (25 countries), pegged
to another currency and even some no national currency.
2. LITERATURE REVIEW
2.1 EXCHANGE RATE AND TRADE:
Nicita Alessandro (2013) stated a concern about the importance of exchange rates on international
trade by analysing the impact of volatility and misaligned exchange rates have on trade. The
estimation consists of f100 countries and 10 years dataset following the fixed effect model. It was
formed out that exchange rate misalignment results in trade diversion. This paper agrees to the use of
trade policy to compensate the consequences of overvalued currency. The paper concludes with three
policy implications. The first one is policy makers need to pay attention to the exchange rates of their
countries and other countries. Second the adjustment in exchange rates should be accompanied by
other policy actions. Third protectionist measures should include multilateral cooperation related to
the stabilization of exchange rate towards their equilibrium level.
Arize,Osang,Slottje (2000) investigated empirically the impact pf real exchange rate volatility on the
export flows of 13 LDC’s over the quarterly period 1973-1996. Foreign exchange rates for developing
and developed countries have been highly volatile since the abandonment of fixed exchange rates in
March 1973. Theoretical analyses of the relationship between higher exchange rate volatility and
international trade transactions have been conducted by Hooper and Kohlhogen(1978). It stated that
when exchange rates become unpredictable, it creates uncertainity about the profits to be made and
hence reduces the benefit of international trade. The estimates of the short run dynamics are obtained
through the error-correction technique. The results suggested negative and statistical significant long
run relationship between export flows and exchange rate volatility in each of the 13 LDC’s. the study
by Brada and Mendez (1988) included 14 developing countries and concluded that exchange rate
uncertainity inhibits bilateral exports.
Hooper, Kohlhagen (1978), analysed the theoretical impact of exchange risk on both equilibrium
prices and quantities. Since floating of exchange rates in the spring of 1973 there has been a
considerable increase in the variation of bilateral exchange rates. Clark and Haulk (1972) investigated
the effects of exchange rate fluctuations on the volume of Canadian tarde during the 1950’s Canadian

dollar float. In section 2 the theoretical structure of the model is presented and the effects of exchange
uncertainity on the price and volume of trade are analysed. The impact of exchange risk is analysed
and it is found out that if traders are risk averse, an increase in exchange risk will ambiguously reduce
the volume of trade whether the risk is borne by importers or exporters. If importers bear the risk the
price will fall as import demand falls and in the opposite scenario exporters charge an increasingly
higher premium.
Cote (may 1994), stated that proponents of fixed rate argued that since the advent of the floating
regimes, exchange rates have been subjected to excessive volatility and deviations from equilibrium
values. Exchange rate volatility can affect trade directly through uncertainity and adjustments costs
and indirectly through its effect on the structure of output and investment and on govt policy. The
analysis is based on the assumptions that a firm willingness to enagage in international tarde depends
on its assessment of its long run probability. The result showed a mixed effect of exchange rate
volatility. The literature suggests that exchange rate volaitility rather than having a direct effect on
trade volume have a greater influence through investment location decisions.
Mosteanu Roxana Narcisa ,in her paper stated that the currency exchange rate is very important in
trading operations between countries. It aimed to present what impact of pegging currency in US
dollar or in Euro have on economic and social development for a number of countries from GCC and
Europe areas, within last ten years. It studied the effect of pegging the exchange rate to US dollar
during the period 2006 – 2016 and presents also those cases in which currencies are pegged to Euro.
The researcher is focused on the effect of these fixed exchange rates on the economic and social
development level. The research developed revealed that there are two models: GCC model –
currency pegged in US dollar; and European model – currency pegged in Euro. The analysis was
conducted based on official data and conducted to the result that is a very strong connection between
currency pegged into well trade foreign currency, keeping the exchange rate fixed, and the level of
economic growth, inflation and unemployment rate.
2.2 EXCHANGE RATE AND MONETARY POLICY:
Hutchison, Sengupta, Singh(2010) challenged to manage the exchange rates, interest rates and the
capital account openness simultaneously. It states that the trilemma principle has been emerging as
objective to solve the exchange rate stability. It mentioned that the rise is financial integration is
corresponded with limitations on monetary independence and exchange rate stability. The trilemma
index is calculated for India and its evolution is investigated using the cross sectional methodology.
The second part provides a narrative account of the process of financial integration and describes how
it was led both by explicit policy decisions and private market forces in India and abroad. It discusses

about the financial trade-offs and integration and management of its reserves. The third section
includes the data estimation by using the cross section including indices for monetary independence
exchange rate stability and capital account openness. It validates the notion that a rise in one trilemma
variable should be traded off with a drop of weighted sum of the other two.
Amato, Filardo, Galati, Peter. Zhu (2005), stated the research conducted by the Central Bank on
exchange rate and monetary policy. This paper is divided into two parts. The first part focusses on the
approaches that the Central Bank found for modelling exchange rate behaviour. The ex-post and ex-
ante exchange rate behaviour are explained. The second part includes the actual cases where countries
incorporated the exchange rate into their monetary policy decisions. Research conducted at Reserve
Bank of New Zealand suggested that reducing exchange rate volatility through policy instruments can
be very cost in terms of higher variability in inflation, output and interest rate.
Martin (1996) studies the initial effects of exchange rates-based stabilization programs within a
dynamics general equilibrium model of a small open economy in which inflation acts as a tax on
intermediate transactions and capital accumulations is subjected to convex adjustment cost and
gestation lags. It stated that a large no.of chronic inflation countries has used the nominal exchange
rate as an anchor to control inflation. The main component of exchange rate-based stabilization
programs is the announce of a reduction in the rate of devaluation aimed at curbing the inflationary
expectations. In the model presented here, inflation acts as a tax on domestic market transaction and
generate a wedge between the rate of return on domestic capital and the rate of return on foreign
assets. The model predicts the typical boom-recession cycle associated with exchange rate-based
stabilization programs: the expansionary phase of the cycle is characterized by a boom in aggregate
spending, persistent inflation, real exchange rate and capital inflow and vice-versa.
2.3 EXCHANGE RATE AND ECONOMIC GROWTH
Goyal (2010) through out her papers tries to determine the objectives of Govt for changing INR trends
and volatility. It discusses concerns to prevent appreciation from trade deficit, large inflows, higher
inflation, etc. The paper argues that advancement of markets and policy makes it possible to achieve
more objectives. The paper has been divided into 8 sections including the trends, determinants of
exchange rate, analysing the policy, etc. The trends depicts the volatility of exchange rates after the
depcriation. It showed that the intrinsic volatility in Indian Forex Reserve markets has increased from
very low levels in the fixed exchange rates immediately after nineties reforms. It stated that the
guiding hand behind markets to have become weaker in the past 2 years. The nominal and real
exchange rates swings have exceeded 10%. The 3rd section includes the determinants of currency
value. It stated that in the short term market perceptions and policy affects the exchange rates whereas

in the long term deviations from the equilibrium levels. The CB plays a vital role as it has more
information and ammunitions than any other market participants and its policy affects the outcomes.
The author suggested high inflation as a tool to stabilize rise in interest rates. A more flexible
exchange rate supports a counter cyclical interest rate. The can decrease the probability of currency
crisis. The paper discusses about hedging property of the RBI. It holds the exchange rate fixed against
the markets volatility. The author then concludes the paper by stating that analysis can help to figure
out the consequences of policy choices, suggest the course of action,etc.
Panagariya (2001) divided his paper into two parts: achievements so far and things to be achieved.
The paper begins with some informations on the beginning of economic reforms i.e. 1991. The
researcher compares the growth of economic reforms with that of the hour hand of the clock which
looks static yet completes a full circle every 12 hrs. The achievement sections begins with industrial
policy. The paper points out the state of monopoly being provided only to the heavy industries while
the small scale industries were subjected to strict licensing policy. In the past 10 years of reforms, the
domestic economy are free from state control. State monopoly and License Raj has been abolished. In
the area of international trade imports licensing was pervasive with goods divided into banned,
restricted, limited permissible and subject to OGL. Imports were also subject to heavy tariffs with top
rate of 400%. Today imports licensing has been abolished. The highest tariff rate came down to 45%.
The same goes for the telecommunications sector, today there is an active participation in the telecom
sector. Similarly insurance has been open to private investors. The next sections where the researcher
states things to be achieved starts with analysing the combined effect of deficit at centre and state that
exceeds 10% of GDP. The key deficiency of India’s growth is the failure of the conventional industry
to pull workers out of the agricultural into gainful employement. In case of infrastructure they need
expansion as well as improvement in the quality of service. The power sector has been govt monopoly
and suffers from proverbial inefficiency. Farmers need adequate supply of water and electricity. The
need for the expansion of primary education are well recognized while higher education are still under
govt monopoly. The paper concludes with analysing the past experience and stating changes are
possible.
Rodrik (2008) showed that undervaluation of the currency (a high real exchange rate) stimulates
economic growth. These results suggest that tradables suffer disproportionately from the government
or market failures that keep poor countries from converging toward countries with higher incomes.
This paper present two categories of explanations for why this may be so, the first focusing on
institutional weaknesses, and the second on product-market failures. A formal model elucidates the
linkages between the real exchange rate and the rate of economic growth. According to the paper a 50
percent undervaluation is estimated to increase the share of industry in total employment by 2.1
percentage points (0.042 × 0.50), which is quite large given that the typical share of industry in total

employment in developing countries is around 20 percent. An increase in the industrial employment
share is in turn estimated to raise growth roughly one for one.
2.4 EXCHANGE RATE AND FINANCIAL DEVELOPMENT:

Aghion, Bacchetta, Rogoff, Rancie` re (2009) stated that the effect of exchange rate volatility on real
activity to be small or insignificant. this paper offers empirical evidence that real exchange
rate volatility can have a significant impact on productivity growth and that the effect depends
critically on a country's level of financial development. The vast empirical literature following Baxter
and Stockman (1989) and Flood and Rose (1995) generally finds no detectable difference in
macroeconomic performance between fixed and floating exchange rate regimes. In this paper they
argued that instead of looking at exchange rate volatility in isolation, it is important to look at the
interaction between exchange rate volatility and both the level of financial development and the
nature of macroeconomic shocks. They hypothesised that higher levels of excess exchange rate
volatility can stunt growth, especially in countries with thin capital markets. According to them, the
classical literature holds that the greater the volatility of real shocks relative to financial shocks in a
country, the more flexible the exchange rate in that country should be. Their analysis shows that this
prescription must be modified to allow for the fact that financial market shocks are amplified in
developing countries with thin and poorly developed credit markets.
Acosta, Baerg, Mandelman (2009) stated that for developing countries, remittances are an important
and expanding source of capital, equivalent to two-thirds of overall foreign direct investment and
nearly 2 percent of gross domestic product. This paper examines the relationship between remittance
inflows, financial sector development, and the real exchange rate. The authors test whether financial
sector development can prevent appreciation of the real exchange rate. They show that well-
developed financial sectors can more effectively channel remittances into investment opportunities.
This effect is weaker in countries with deeper and more sophisticated financial markets, which seem
to retain trade competitiveness.
2.5 EXCHANGE RATE AND EMERGING COUNTRIES:
Calvo, Mishkin (2003) argued that much of the debate on choosing an exchange rate regime misses
the boat. It begins by discussing the standard theory of choice between exchange rate regimes, and
then explores the weaknesses when it is applied to emerging market economies. It then discusses a
range of institutional traits that might predispose a country to favor either fixed or floating rates, and
then turns to the converse question of whether the choice of exchange rate regime may favor the
development of certain desirable institutional traits. It concludes that the choice of exchange rate
regime is likely to be of second order importance to the development of good fiscal, financial, and
10

monetary institutions in producing macroeconomic success in emerging market countries. A focus on
institutional reforms rather than on the exchange rate regime may encourage emerging market
countries to be healthier and less prone to the crises that we have seen in recent years.
Mishkin (2002) examined the question of whether pegging exchange rates is a good strategy for
emerging‐market countries. It suggested although pegging the exchange rate provides a nominal
anchor for emerging‐market countries that can help them to control inflation, it does not provide
support for this strategy for the conduct of monetary policy. It stated that it entails the loss of an
independent monetary policy, exposes the country to the transmission of shocks from the anchor
country, increases the likelihood of speculative attacks and potentially weakens the accountability of
policymakers to pursue anti‐inflationary policies. It heightens the potential for financial risk. This
paper suggests that a strategy with a greater likelihood of success involves the granting of
independence to the central bank and the adoption of inflation targeting.
Berganza, Espa˜na, Broto, Espa˜na (2011) stated that emerging economies with inflation targets face a
dilemma between fulfilling the theoretical conditions of strict inflation target, which implies a fully
flexible exchange rate, or applying a flexible inflation target, which entails a de facto managed
floating exchange rate with forex interventions to moderate exchange rate volatility. Since New
Zealand adopted an inflation target in 1990, an increasing number of countries have implemented this
type of monetary policy framework. According to IMF (2005) and Little and Romano (2009), after
Israel adopted its inflation target in 1997, 18 emerging countries have changed their exchange rate
regime from fixed to floating and their nominal anchor from exchange rate to inflation. This
framework has been more durable than other monetary policy strategies. They used a panel data
model for 37 countries and found out that, although inflation target lead to higher exchange rate
instability than alternative regimes, forex interventions in some inflation targeted countries have been
more effective in reducing volatility than in non-inflation target countries. This concluded their paper
with justification of the use of flexible inflation target by policymakers.
Fischer (2001) The bipolar or two-corner solution view of exchange rates is that intermediate policy
regimes between hard pegs and floating are not sustainable. This paper argues that the proponents of
the bipolar view have probably exaggerated their point. The right statement is that for countries open
to international capital flows, softly pegged exchange rates are crisis-prone and not sustainable over
long periods. However, a wide variety of flexible rate arrangements remains possible. Monetary and
exchange rate policy in most countries should not and will not be indifferent to exchange rate
movements
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3 RESEARCH DESIGN
3.1 Objective of the study:
The following topic is considered to find out the impact of change in exchange rates regime
on selected macroeconomic factors in emerging countries.
3.2 Sample Selection:
According to the IMF annual report (2010), the two emerging countries selected are
Indonesia and Poland. According to the report Indonesia changed its exchange rate system
from stabilized to floating in the year 2012 while Poland changed its regime from free
floating to managed floating.
3.3 Study Period:
In this study the year ‘2011’ has been considered as the year of policy intervention or
reclassification. Therefore we take 7 years pre and 7 year post from the reclassification year.
Thus, we consider the year range of 2004-2018.
3.4 Data Source:
The data used during this study included secondary data source. Published research papers
and journals were reviewed. The data for different variables were taken from the official
website of the IMF, World Bank and Census and Economic Information Centre (CEIC).
3.5 Methodology:
The factors that are selected for this study were derived from the literatures reviewed. The
factors that we consider here are the economic growth, financial stability, trade, investment,
inflation. Under these factors we consider certain variables like the real GDP growth, import
and export volume, bank rates, investment% of GDP also known as the Gross Capital
Formation (GCF) and the Consumer Price Index (CPI).
We run a paired t-test for individual variables for the two countries and consider a hypothesis
as follows:
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Ho : (µ1 - µ2 ) =0
Ha : (µ1 - µ2 ) >0
Ha : (µ1 - µ2 ) <0
Where we shall accept the null hypothesis if there is no difference in the pre and post
reclassification economic condition or accept the alternative hypothesis if vice-versa. The
paired t-test is conducted in order to find the mean variable of two countries from the pre
and post reclassification period.
4. RESULT AND FINDINGS
4.1 INVESTMENT % OF GDP (GCF):
In table no. 1 and 7, after running a paired t-test, we found that for Poland. The difference that we find
in the pre and post investment % is less than 0 i.e. -6.962714. The t-value calculated is found to be
less than the degree of significance. Therefore we reject the Ho and accept the Ha for difference being
less than 0. For Indonesia, the t-value calculated is -9.6267. it is less than 0.05. the difference found
out to be -6.926. Thus we reject the Ho and accept the alternate hypothesis.
4.2 BANK LENDING RATE:
For Poland ,in table no-8 the calculated t-value, which is 11.1739. The difference between the pre and
post bank lending rates is found to be 1.182309. This implies that we should reject the Ho and accept
the Ha where the difference is greater than 0. For Indonesia, in table no-2 the t-value is found to be
17.0569 which insignificant. The difference here is found positive with 2.474 which states that the
null hypothesis is rejected and the alternative hypothesis is accepted for greater than 0.
4.3 POLICY RATE:
For Poland, in table no-9 the t-value was found positive with 11.3814 and the difference to be
1.996528. Hence we reject the Ho hypothesis and accept the alternate hypothesis where the difference
will be greater than 0. For Indonesia, we faced a limitation as the complete data was not available and
therefore the pre and post reclassification analysis wasn’t complete.
4.4 INFLATION (CPI):
13

For Poland, , in table no-10, the t-value is found as 5.7205 and the difference between pre and post
reclassification is .7404. we reject the null hypothesis and accept the alternative hypothesis of
difference being greater than 0. In Indonesia, , in table no-3, the value of t-value is greater than 0.05
stating it as insignificant and therefore we reject the null hypothesis and accept the alternate
hypothesis. The difference value is .547625.
4.5 REAL GDP GROWTH:
In Poland, , in table no-11, the t-value is -0.1170 which is less than the degree of significance 0.05.
Therefore we reject the Ho and accept the Ha where the difference is less than 0. We can conclude
that the economic growth was seen after the reclassification period. For Indonesia, , in table no-4, the
t-value is calculated as -0.1170. The difference is found to be -163.7834. Therefore we reject the null
hypothesis and accept the alternate hypothesis of difference less than 0. the country achieved a better
state after the reclassification.
4.6 EXCHANGE RATE:
For Poland, , in table no-12, t value is less than the significant vale i.e. 0.05. The value of t is -
14.0213. If the t-value is less than the degree of significance we reject the Ho and accept Ha. Here the
alternative hypothesis that we shall consider is the one with difference less than 0. In Indonesia, , in
table no-5, t-value is found negative.i.e. less than 0.05. the difference was found as -2850.153. we
therefore reject the Ho hypothesis and accept the Ha hypothesis for difference less than 0. the findings
are similar with that of Poland.
4.7 TRADE VOLUME:
This part is divided into two sections, i.e. for total exports and total imports. For Indonesia, , in table
no-6, the t-value for exports was found to be 6.6319 and the difference of pre and post was 17.6999.
Here we shall reject the Ho and accept the alternative hypothesis of difference being greater than 1.
Similarly the imports are found to have a positive difference in the pre and post reclassification
period. For Poland, , in table no-13, there was a positive difference in the pre and post reclassification.
Therefore we shall reject the Ho hypothesis and accept the Ha hypothesis.
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5. SUMMARY OF FINDINGS
In this study we find a mixed impact of the reclassification on the emerging economies. We found out
that whereas the reclassification was found beneficial for the inflation condition for both the countries
in factors like GDP growth and GCF the condition were better before the reclassification for both the
countries. For Indonesia, at the same time, the trade volume increased after the reclassification of
exchange rate regime. For Poland, the export was increased after the reclassification of exchange rate
regime. It showed that the policy rate for both the countries improved after the reclassification and
simultaneously did the bank lending rate .
The following table summarizes the impact of reclassification.
VARIABLES POLAND INDONESIA

INVESTMENT % (GCF) The GCF condition was better The GCF condition was better
before the reclassification before the reclassification
BANK LENDING RATE The lending rate improved The lending rate improved
POLICY RATE Improved after reclassification Improved after reclassification
INFLATION (CPI) Lower inflation rate after the Lower inflation rate after the
reclassification reclassification
REAL GDP GROWTH The reclassification negatively The reclassification negatively
affected the GDP growth affected the GDP growth
EXCHANGE RATE The impact was positive The impact was positive
TRADE VOLUME Export -import increased after Export -import increased after
reclassification reclassification
6. LIMITATIONS
While conducting this study numerous limitations and drawbacks were faced. The data weren’t
available for some variables which was barrier for analysing the pre-post reclassification impact. The
studies made on this topic was limited which restrained further knowledge on this study. Shortage of
time acted as a major drawback on this study.
If provided with better resources and data the findings could have been more unbiased and accurate as
well.
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REFERENCES
1. Augustine C. Arize, Thomas Osang, Daniel J. Slottje, (2000), “Exchange-Rate Volatility and
Foreign Trade: Evidence from Thirteen LDC's Source: Journal of Business & Economic Statistics”,
Vol. 18, No. 1, pp. 10-17
2. Jeffery A., Andrew F., Gabriele G., Goetz V. and Feng Z. (June 2005) “Research on exchange rates
and monetary policy: an overview”, BIS Working Papers, No 178
3. Stanley. F,(2001), “Exchange Rate Regimes: Is the Bipolar View Correct?”, Journal of Economic
Perspectives—Volume 15, Number 2, Pages 3–24
4. Dani R., (2008), The Real Exchange Rate and Economic Growth, Brookings Papers on Economic
Activity
5. Philippe A., Philippe B., Romain R., and Kenneth R., (2009), Exchange rate volatility and
productivity growth: The role of financial development, Journal of Monetary Economics 56 (2009)
494–513
6. Emi N. and Jon S., (2018), Exchange Rate Regimes
7. Hugh T., (2016), Financial Development and Economic Growth in Underdeveloped countries,
Journal of University of Chicago pp 174-189.
8. Pablo A., Nicole R. and Federico S., (2009), Financial Development, Remittances,
and Real Exchange Rate Appreciation, Federal Reserve Bank of Atlanta
Economic Review Volume 94
9. Juan C. and Carmen B., (2011), Flexible inflation targets, forex interventions
and exchange rate volatility in emerging
countries, BOFIT Discussion Papers
10. Alessandro N., (2013), EXCHANGE RATES, INTERNATIONAL TRADE

AND TRADE POLICIES, POLICY ISSUES IN INTERNATIONAL TRADE AND
COMMODITIES STUDY SERIES No. 56
11. IMF,(2010), “Annual Report on Exchange Arrangements and Exchange Restrictions”.
12. Arvind.P.,(2001),”INDIA’S ECONOMIC REFORMS”, ERD POLICY BRIEF SERIES, No. -2
13. Asima.G (2010), EVOLUTION OF INDIA’S EXCHANGE RATE REGIME”.
16

APPENDIX
TABLES. (INDONESIA)
1. INVESTMENT% OF GDP (GCF):
. ttest pre == post, unpaired
Two-sample t test with equal variances

------------------------------------------------------------------------------
Variable | Obs Mean Std. Err. Std. Dev. [95% Conf. Interval]
---------+--------------------------------------------------------------------
pre | 28 27.30936 .6763721 3.579025 25.92156 28.69716
post | 28 34.27207 .2562111 1.355742 33.74637 34.79777
---------+--------------------------------------------------------------------
combined | 56 30.79071 .5905623 4.419364 29.6072 31.97423
---------+--------------------------------------------------------------------
diff | -6.962714 .7232727 -8.412789 -5.51264
------------------------------------------------------------------------------
diff = mean(pre) - mean(post) t = -9.6267
Ho: diff = 0 degrees of freedom = 54
Ha: diff < 0 Ha: diff != 0 Ha: diff > 0

Pr(T < t) = 0.0000 Pr(|T| > |t|) = 0.0000 Pr(T > t) = 1.0000
2. BANK LENDING:

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 84 14.22024 .1202239 1.10187 13.98112 14.45936
post | 84 11.74595 .0811708 .7439428 11.58451 11.9074
---------+--------------------------------------------------------------------
combined | 168 12.9831 .1199747 1.55505 12.74623 13.21996
---------+--------------------------------------------------------------------
diff | 2.474286 .1450603 2.187885 2.760687
------------------------------------------------------------------------------
diff = mean(pre) - mean(post) t = 17.0569

Pr(T < t) = 1.0000 Pr(|T| > |t|) = 0.0000 Pr(T > t) = 0.0000
3. INFLATION:
ttest pre == post, unpaired
17

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 24 4.897083 .257345 1.260728 4.364725 5.429442
post | 24 4.349458 .0524751 .2570743 4.240905 4.458011
---------+--------------------------------------------------------------------
combined | 48 4.623271 .1359164 .9416567 4.349842 4.896699
---------+--------------------------------------------------------------------
diff | .547625 .2626406 .018957 1.076293
------------------------------------------------------------------------------

Pr(T < t) = 0.9787 Pr(|T| > |t|) = 0.0426 Pr(T > t) = 0.0213
4. GDP GROWTH:

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 7 3510.714 1397.569 3697.619 90.98687 6930.442
postmean | 7 3674.498 74.08169 196.0017 3493.226 3855.769
---------+--------------------------------------------------------------------
combined | 14 3592.606 672.6964 2516.999 2139.334 5045.878
---------+--------------------------------------------------------------------
diff | -163.7834 1399.531 -3213.099 2885.532
------------------------------------------------------------------------------
diff = mean(pre) - mean(postmean) t = -0.1170

Pr(T < t) = 0.4544 Pr(|T| > |t|) = 0.9088 Pr(T > t) = 0.5456
5 EXCHANGE RATE
ttest pre == post, unpaired

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
18

pre | 84 9446.323 75.60483 692.9297 9295.948 9596.698
post | 84 12296.48 188.6892 1729.365 11921.18 12671.77
---------+--------------------------------------------------------------------
combined | 168 10871.4 149.7625 1941.144 10575.73 11167.07
---------+--------------------------------------------------------------------
diff | -2850.153 203.2725 -3251.485 -2448.82
------------------------------------------------------------------------------

Pr(T < t) = 0.0000 Pr(|T| > |t|) = 0.0000 Pr(T > t) = 1.0000
6. TRADE VOLUME:
EXPORT

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 84 16.34985 2.195937 20.1261 11.98221 20.71748
post | 84 -.9201429 1.3999 12.83029 -3.704487 1.864201
---------+--------------------------------------------------------------------
combined | 168 7.714851 1.460068 18.92464 4.832281 10.59742
---------+--------------------------------------------------------------------
diff | 17.26999 2.604201 12.12836 22.41161
------------------------------------------------------------------------------

Pr(T < t) = 1.0000 Pr(|T| > |t|) = 0.0000 Pr(T > t) = 0.0000
IMPORT:
------------------------------------------------------------------------------
19

---------+--------------------------------------------------------------------
pre | 24 9.598458 7.829238 38.35527 -6.597554 25.79447
post | 24 3.089833 1.990533 9.751582 -1.027899 7.207565
---------+--------------------------------------------------------------------
combined | 48 6.344146 4.024053 27.87946 -1.751205 14.4395
---------+--------------------------------------------------------------------
diff | 6.508625 8.078316 -9.752181 22.76943
------------------------------------------------------------------------------
Pr(T < t) = 0.7877 Pr(|T| > |t|) = 0.4246 Pr(T > t) = 0.2123
TABLES. (POLAND):
7 INVESTMENT% OF GDP (GCF):

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 28 27.30936 .6763721 3.579025 25.92156 28.69716
post | 28 34.27207 .2562111 1.355742 33.74637 34.79777
---------+--------------------------------------------------------------------
combined | 56 30.79071 .5905623 4.419364 29.6072 31.97423
---------+--------------------------------------------------------------------
diff | -6.962714 .7232727 -8.412789 -5.51264
------------------------------------------------------------------------------

Pr(T < t) = 0.0000 Pr(|T| > |t|) = 0.0000 Pr(T > t) = 1.0000
20

8. BANK LENDING:

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 84 3.279095 .0654277 .599655 3.148962 3.409228
post | 84 2.096786 .0831567 .7621437 1.93139 2.262181
---------+--------------------------------------------------------------------
combined | 168 2.68794 .0698197 .9049671 2.550097 2.825784
---------+--------------------------------------------------------------------
diff | 1.182309 .1058103 .9734021 1.391217
------------------------------------------------------------------------------

Pr(T < t) = 1.0000 Pr(|T| > |t|) = 0.0000 Pr(T > t) = 0.0000
9. . POLICY RATES:
------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 72 4.409722 .1118149 .9487812 4.18677 4.632675
post | 72 2.413194 .1351656 1.146919 2.143682 2.682707
---------+--------------------------------------------------------------------
combined | 144 3.411458 .1208637 1.450364 3.172548 3.650369
---------+--------------------------------------------------------------------
diff | 1.996528 .1754204 1.649755 2.343301
------------------------------------------------------------------------------
21

Pr(T < t) = 1.0000 Pr(|T| > |t|) = 0.0000 Pr(T > t) = 0.0000
10.. INFLATION:

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 28 27.30936 .6763721 3.579025 25.92156 28.69716
post | 28 34.27207 .2562111 1.355742 33.74637 34.79777
---------+--------------------------------------------------------------------
combined | 56 30.79071 .5905623 4.419364 29.6072 31.97423
---------+--------------------------------------------------------------------
diff | -6.962714 .7232727 -8.412789 -5.51264
------------------------------------------------------------------------------

Pr(T < t) = 0.0000 Pr(|T| > |t|) = 0.0000 Pr(T > t) = 1.0000
11. GDP GROWTH:

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 7 3510.714 1397.569 3697.619 90.98687 6930.442
postmean | 7 3674.498 74.08169 196.0017 3493.226 3855.769
---------+--------------------------------------------------------------------
combined | 14 3592.606 672.6964 2516.999 2139.334 5045.878
---------+--------------------------------------------------------------------
diff | -163.7834 1399.531 -3213.099 2885.532
------------------------------------------------------------------------------
diff = mean(pre) - mean(postmean) t = -0.1170

Pr(T < t) = 0.4544 Pr(|T| > |t|) = 0.9088 Pr(T > t) = 0.5456
22

12. EXCHANGE RATE:

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 84 9446.323 75.60483 692.9297 9295.948 9596.698
post | 84 12296.48 188.6892 1729.365 11921.18 12671.77
---------+--------------------------------------------------------------------
combined | 168 10871.4 149.7625 1941.144 10575.73 11167.07
---------+--------------------------------------------------------------------
diff | -2850.153 203.2725 -3251.485 -2448.82
------------------------------------------------------------------------------

Pr(T < t) = 0.0000 Pr(|T| > |t|) = 0.0000 Pr(T > t) = 1.0000
13. TRADE VOLUME:
EXPORT.

------------------------------------------------------------------------------
---------+--------------------------------------------------------------------
pre | 84 13.28429 1.240346 11.36795 10.81729 15.75128
post | 84 7.856226 .576203 5.280988 6.710182 9.002271
---------+--------------------------------------------------------------------
combined | 168 10.57026 .7133892 9.246581 9.161832 11.97868
---------+--------------------------------------------------------------------
diff | 5.42806 1.36765 2.727829 8.12829
------------------------------------------------------------------------------

Pr(T < t) = 0.9999 Pr(|T| > |t|) = 0.0001 Pr(T > t) = 0.0001
23

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WORKING PAPER

COMPARISON OF EFFECTS OF RECLASSIFICATION OF

Sudeshna Saha, Nivedita Mandal, Rituparna Das*

*Corresponding Author <dr.rituparnadas@outlook.com>

Electronic copy available at: https://ssrn.com/abstract=3545977

1.1 EXCHANGE RATE:

1.2 EXCHANGE RATE SYSTEM:

Electronic copy available at: https://ssrn.com/abstract=3545977

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1.4 EVOLUTION OF EXCHANGE RATE:

THE FIRST PHASE: BIMETALLISM (1870-1875)

THE CLASSICAL GOLD STANDARD (1875-1914)

WORLD WAR PERIOD (1915-1944)

Electronic copy available at: https://ssrn.com/abstract=3545977

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Electronic copy available at: https://ssrn.com/abstract=3545977

2.2 EXCHANGE RATE AND MONETARY POLICY:

Electronic copy available at: https://ssrn.com/abstract=3545977

2.3 EXCHANGE RATE AND ECONOMIC GROWTH

Electronic copy available at: https://ssrn.com/abstract=3545977

Electronic copy available at: https://ssrn.com/abstract=3545977

2.4 EXCHANGE RATE AND FINANCIAL DEVELOPMENT:

2.5 EXCHANGE RATE AND EMERGING COUNTRIES:

Electronic copy available at: https://ssrn.com/abstract=3545977

Electronic copy available at: https://ssrn.com/abstract=3545977

3.1 Objective of the study:

3.2 Sample Selection:

3.3 Study Period:

3.4 Data Source:

Electronic copy available at: https://ssrn.com/abstract=3545977

4. RESULT AND FINDINGS

4.1 INVESTMENT % OF GDP (GCF):

4.2 BANK LENDING RATE:

4.3 POLICY RATE:

4.4 INFLATION (CPI):

Electronic copy available at: https://ssrn.com/abstract=3545977

4.5 REAL GDP GROWTH:

4.6 EXCHANGE RATE:

4.7 TRADE VOLUME:

Electronic copy available at: https://ssrn.com/abstract=3545977

The following table summarizes the impact of reclassification.

VARIABLES POLAND INDONESIA

Electronic copy available at: https://ssrn.com/abstract=3545977

6. Emi N. and Jon S., (2018), Exchange Rate Regimes

10. Alessandro N., (2013), EXCHANGE RATES, INTERNATIONAL TRADE

11. IMF,(2010), “Annual Report on Exchange Arrangements and Exchange Restrictions”.

12. Arvind.P.,(2001),”INDIA’S ECONOMIC REFORMS”, ERD POLICY BRIEF SERIES, No. -2

13. Asima.G (2010), EVOLUTION OF INDIA’S EXCHANGE RATE REGIME”.

Electronic copy available at: https://ssrn.com/abstract=3545977

Two-sample t test with equal variances

Ha: diff < 0 Ha: diff != 0 Ha: diff > 0

. ttest pre == post, unpaired

Two-sample t test with equal variances

Ha: diff < 0 Ha: diff != 0 Ha: diff > 0

ttest pre == post, unpaired

Two-sample t test with equal variances

Electronic copy available at: https://ssrn.com/abstract=3545977