Fixing for Your Life
The Asian crisis took place against a background of exchange rate regimes that were characterized as soft pegs. This has led many analysts to conclude that the peg did it' and that emerging markets (EMs) should just say no' to pegged exchange rates. We present evidence that EMs are very different from developed economies in key dimensions that play a key role when it comes to the choice of exchange rate regime--floating for EMs is no panacea. In EMs currency crashes are contractionary, the adjustments in the current account are far more acute. Credibility and market access, as captured in the behavior of credit ratings and interest rates, is adversely affected by devaluations or depreciations. Exchange rate volatility is more damaging to trade and the passthrough from exchange rate swings to inflation is far higher in EMs. These differences between emerging and developed economies may explain EMs reluctance to tolerate large exchange rate movements. In a simple framework we illustrate why large exchange rate swings are feared when access to international credit may be lost.
|Date of creation:||Nov 2000|
|Date of revision:|
|Publication status:||published as Calvo, G. (ed.) Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy? Cambridge, MA: MIT Press 2005.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
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.:
- Sebastian Edwards, 1985.
"Are Devaluations Contractionary?,"
NBER Working Papers
1676, National Bureau of Economic Research, Inc.
- Richard Cantor & Frank Packer, 1996. "Sovereign risk assessment and agency credit ratings," European Financial Management, European Financial Management Association, vol. 2(2), pages 247-256.
- Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
- Grobar, Lisa Morris, 1993. "The effect of real exchange rate uncertainty on LDC manufactured exports," Journal of Development Economics, Elsevier, vol. 41(2), pages 367-376, August.
- Richard Cantor & Frank Packer, 1996.
"Determinants and impacts of sovereign credit ratings,"
9608, Federal Reserve Bank of New York.
- Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
- Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
- Kenen, Peter B & Rodrik, Dani, 1986. "Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 311-15, May.
- Barry Eichengreen & Ricardo Hausmann, 1999.
"Exchange Rates and Financial Fragility,"
NBER Working Papers
7418, National Bureau of Economic Research, Inc.
- Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
- Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
- Qian, Ying & Varangis, Panos, 1994. "Does Exchange Rate Volatility Hinder Export Growth?," Empirical Economics, Springer, vol. 19(3), pages 371-96.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Rose, Andrew K, 1999.
"One Money, One Market: Estimating the Effect of Common Currencies on Trade,"
CEPR Discussion Papers
2329, C.E.P.R. Discussion Papers.
- Rose, Andrew, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," Seminar Papers 678, Stockholm University, Institute for International Economic Studies.
- Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
- Morley, Samuel A, 1992. "On the Effect of Devaluation during Stabilization Programs in LDCs," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 21-27, February.
- McKinnon, Ronald I., 1979. "Money in International Exchange: The Convertible Currency System," OUP Catalogue, Oxford University Press, number 9780195024098, March.
- Laura E. Kodres & Matthew Pritsker, 1998. "A rational expectations model of financial contagion," Finance and Economics Discussion Series 1998-48, Board of Governors of the Federal Reserve System (U.S.).
- McKinnon, Ronald, 2000.
"Mundell, the Euro, and the World Dollar Standard,"
Journal of Policy Modeling,
Elsevier, vol. 22(3), pages 311-324, May.
- Brada, Josef C & Mendez, Jose, 1988. "Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trade," Kyklos, Wiley Blackwell, vol. 41(2), pages 263-80.
- Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000.
"Why Do Countries Float the Way They Float?,"
Research Department Publications
4205, Inter-American Development Bank, Research Department.
- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Reinhart, Carmen, 2000. "The mirage of floating exchange rates," MPRA Paper 13736, University Library of Munich, Germany.
- Arize, Augustine C & Osang, Thomas & Slottje, Daniel J, 2000. "Exchange-Rate Volatility and Foreign Trade: Evidence from Thirteen LDC's," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 10-17, January.
- Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:8006. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.