Exchange-Rate Policies For Developing Countries: What Have We Learned? What Do We Still Not Know?
AbstractThe 1997–1998 Asian crisis, with its offshoots in Eastern Europe and Latin America, has reignited the debate about appropriate exchange-rate policies for developing countries. One widely shared conclusion from this episode is that adjustable or crawling pegs are extremely fragile in a world of volatile capital movements. The pressure resulting from massive capital flow reversals and weakened domestic financial systems was too strong even for countries that followed sound macroeconomic policies and had large stocks of reserves. As a consequence, the polar regimes of a "hard pegs" (such as a currency board), or a clean float, are enjoying new popularity. This paper argues that, while currency boards or even dollarization may be justified in some extreme cases, they are not appropriate for all developing countries. The recommendations formulated on the basis of the Mundell-McKinnon criteria for the optimum currency are considered still sensible today. Currency boards face serious implementation problems. One is the choice of the currency to peg to and at what rate; another is the need to ensure stability of the domestic financial system in the absence of a domestic lender of last resort. Floating appears to have wider applicability. As Friedman already argued in the early 1950s,if prices move slowly, it is both faster and less costly to move the nominal exchange rate in response to a shock that requires an adjustment in the real exchange rate. But for exchange-rate flexibility to be stabilizing, it has to be implemented by independent central banks whose commitment to low inflation is credible. Ongoing depreciations that follow from imprudent of opportunistic monetary behaviour will surely come to be expected by agents, and hence will have no real effect; occasional depreciations that respond exclusively to unforecastable shocks will, almost by definition, have real effects. But floating also faces questions of implementation. Given that no central bank completely abstains from intervention in currency markets, what principles should govern such intervention? The paper elaborates on a number of points in this regard on which recent experience is likely to be instructive, but on which more research is needed. Finally, any exchange-rate regime, and especially one of flexible rates, requires complementary policies to increase its chances of success. In this context, some have suggested the use of capital controls; less controversial is the need for prudential regulation of the financial system and for counter-cyclical fiscal policy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by United Nations Conference on Trade and Development in its series G-24 Discussion Papers with number 5.
Date of creation: 2000
Date of revision:
Contact details of provider:
Postal: Palais des Nations, CH - 1211 Geneva 10
Phone: +41 22 907 12 34
Fax: +41 22 907 00 43
Web page: http://www.unctad.org/Templates/Page.asp?intItemID=2101&lang=1
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Enrica Detragiache & Asli DemirgÃ¼Ã§-Kunt, 1998.
"Financial Liberalization and Financial Fragility,"
IMF Working Papers
98/83, International Monetary Fund.
- Laurence Ball, 1998.
"Policy Rules for Open Economies,"
RBA Research Discussion Papers
rdp9806, Reserve Bank of Australia.
- John Williamson, 1999.
"Crawling Bands or Monitoring Bands: How to Manage Exchange Rates in a World of Capital Mobility,"
PB99-03, Peterson Institute for International Economics.
- Williamson, John, 1998. "Crawling Bands or Monitoring Bands: How to Manage Exchange Rates in a World of Capital Mobility," International Finance, Wiley Blackwell, vol. 1(1), pages 59-79, October.
- Obstfeld, Maurice & Rogoff, Kenneth, 1995.
"Exchange Rate Dynamics Redux,"
Journal of Political Economy,
University of Chicago Press, vol. 103(3), pages 624-60, June.
- Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
- Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
- Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
- Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998.
"What Caused the Asian Currency and Financial Crisis?,"
Temi di discussione (Economic working papers)
343, Bank of Italy, Economic Research and International Relations Area.
- Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
- Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
- Herrendorf, Berthold, 1997. "Importing Credibility through Exchange Rate Pegging," Economic Journal, Royal Economic Society, vol. 107(442), pages 687-94, May.
- Reinhart, Carmen & Kaminsky, Graciela, 1999.
"The twin crises: The causes of banking and balance of payments problems,"
14081, University Library of Munich, Germany.
- Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
- Michael Gavin & Ricardo Hausmann, 1996.
"The Roots of Banking Crises: The Macroeconomic Context,"
Research Department Publications
4026, Inter-American Development Bank, Research Department.
- Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," IDB Publications 5819, Inter-American Development Bank.
- Roberto Chang & Andres Velasco, 1997.
"Financial fragility and the exchange rate regime,"
97-16, Federal Reserve Bank of Atlanta.
- Reinhart, Carmen & Montiel, Peter, 1999. "Do capital controls influence the volume and composition of capital flows? Evidence from the 1990s," MPRA Paper 13710, University Library of Munich, Germany.
- Maurice Obstfeld, 1991.
"Destabilizing Effects of Exchange-Rate Escape Clauses,"
NBER Working Papers
3603, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice, 1997. "Destabilizing effects of exchange-rate escape clauses," Journal of International Economics, Elsevier, vol. 43(1-2), pages 61-77, August.
- Maurice Obstfeld., 1996. "Destabilizing Effects of Exchange-Rate Escape Clauses," Center for International and Development Economics Research (CIDER) Working Papers C96-075, University of California at Berkeley.
- Obstfeld, Maurice, 1996. "Destabilizing Effects of Exchange-Rate Escape Clauses," Department of Economics, Working Paper Series qt15n3p5dt, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Obstfeld, Maurice, 1991. "Destabilizing Effects of Exchange-Rate Escape Clauses," CEPR Discussion Papers 518, C.E.P.R. Discussion Papers.
- Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
- Barry Eichengreen & Ricardo Hausmann & JÃ¼rgen Von Hagen, 1999. "Reforming Budgetary Institutions in Latin America: The Case for a National Fiscal Council," Open Economies Review, Springer, vol. 10(4), pages 415-442, October.
- Velasco, Andres, 1996. "Fixed exchange rates: Credibility, flexibility and multiplicity," European Economic Review, Elsevier, vol. 40(3-5), pages 1023-1035, April.
- Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
- Krugman, Paul R, 1991.
"Target Zones and Exchange Rate Dynamics,"
The Quarterly Journal of Economics,
MIT Press, vol. 106(3), pages 669-82, August.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
- Roberto Chang & Andres Velasco, 1998.
"The Asian Liquidity Crisis,"
NBER Working Papers
6796, National Bureau of Economic Research, Inc.
- Ricardo Hausmann & Michael Gavin & Carmen Pagés-Serra & Ernesto H. Stein, 1999. "Financial Turmoil and Choice of Exchange Rate Regime," Research Department Publications 4170, Inter-American Development Bank, Research Department.
- Sebastian Edwards & Miguel A. Savastano, 1998. "The Morning After: The Mexican Peso in the Aftermath of the 1994 Currency Crisis," NBER Working Papers 6516, National Bureau of Economic Research, Inc.
- Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
- Herrendorf, Berthold, 1999. "Transparency, reputation, and credibility under floating and pegged exchange rates," Journal of International Economics, Elsevier, vol. 49(1), pages 31-50, October.
- Flávio Vilela Vieira & Márcio Holland, 2004.
"Exchange Rate Dynamics In Brazil,"
Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting]
066, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
- Eduardo Moron & Diego Winkelried, 2002.
"Monetary Policy Rules for Financially Vulnerable EconomieEd,"
- Moron, Eduardo & Winkelried, Diego, 2005. "Monetary policy rules for financially vulnerable economies," Journal of Development Economics, Elsevier, vol. 76(1), pages 23-51, February.
- Eduardo MorÃ³n & Diego Winkelried, 2003. "Monetary Policy Rules for Financially Vulnerable Economies," IMF Working Papers 03/39, International Monetary Fund.
- Corrado, Luisa & Miller, Marcus & Zhang, Lei, 2002.
"Exchange Rate Monitoring Bands: Theory and Policy,"
CEPR Discussion Papers
3337, C.E.P.R. Discussion Papers.
- Corrado, L. & Marcus Miller & Lei Zhang, 2002. "Exchange Rate Monitoring Bands: Theory and Policy," Cambridge Working Papers in Economics 0209, Faculty of Economics, University of Cambridge.
- Luisa Corrado & Marcus Miller & Lei Zhang, 2007. "Exchange Rate Monitoring Bands: Theory and Policy," Money Macro and Finance (MMF) Research Group Conference 2006 146, Money Macro and Finance Research Group.
- Luisa Corrado & Marcus H. Miller & Lei Zhang, 2003. "Exchange Monitoring Bands: Theory and Policy," CEIS Research Paper 8, Tor Vergata University, CEIS.
- Carrera, Jorge Eduardo, 2004. "Hard peg and monetary unions.Main lessons from the Argentine experience," MPRA Paper 7843, University Library of Munich, Germany, revised 2007.
- Barbara Fritz & Laurissa Mühlich, 2006. "Regional Monetary Integration among Developing Countries: New Opportunities for Macroeconomic Stability beyond the Theory of Optimum Currency Areas?," GIGA Working Paper Series 38, GIGA German Institute of Global and Area Studies.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rachid Bouhia).
If references are entirely missing, you can add them using this form.