Exchange-Rate Policies for Emerging Market Economies

Exchange-Rate Policies for Emerging Market Economies

Exchange-Rate Policies for Emerging Market Economies

Exchange-Rate Policies for Emerging Market Economies

Synopsis

Contributors to this volume argue that the costs and benefits of fixed and flexible rates, respectively, vary systematically across different types of economies.

Excerpt

Richard J. Sweeney, Clas Wihlborg and Thomas D. Willett

Exchange Rate Regime Choice: the Debate

The merits and limitations of fixed versus flexible exchange rate regimes are the focus of one of the most long-standing debates in economics. There are important costs to both fixed and flexible rates, the relative costs of each depending on a country's characteristics and circumstances. As a consequence, policymakers in many countries have attempted to avoid choosing between these extremes and have opted for compromise regimes of adjustable or crawling pegs. This was the basic philosophy of the Bretton Woods international monetary system set up at the end of World War ii. However, both economic and political considerations make such compromise systems difficult to manage effectively. This is especially true in a world of high international capital mobility.

The adjustably pegged exchange rate regime of the Bretton Woods system broke down in the early 1970s, but the lessons of this experience were not always remembered. in the 1980s and 1990s, various forms of pegged rate regimes again became popular across the globe, being adopted in Western and Eastern Europe, Asia and Latin America. in the 1990s, the difficulties of managing adjustably pegged exchange rates have once again been dramatically illustrated. the latest example of this point is the Asian currency crises of 1997-98, but many others abound, including the crises surrounding the Bulgarian lev, the Mexican peso, and the Russian ruble in 1994, the European monetary crises in 1992 and 1993 and the failure of the Bretton Woods system itself in the early 1970s. As the workability of compromise exchange rate regimes has become questionable, the choices facing policymakers have become more difficult. To a large extent the current controversy over exchange rate policies in the emerging market economies has simply transferred an ongoing debate to a new battleground. There are, however, arguments about the applicability of fixed or flexible exchange rate regimes based on the special circumstances of the emerging market economies.

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