Choice Of Exchange Rate Regimes For Developing Countries: Better Be Fixed Or Floating?

Abstract

The following paper is a summary article about the choice of exchange rate regime for a developing country considering the importance of “currency mismatches”, “debt intolerance”, “and fear of floating”, “financial globalization”, “institutions and sudden stops”. In this paper, I first summarize recent researches and papers on this specific issue. In a recent work of theirs, Calvo and Mishkin(2003) argue that much of the debate on choosing an exchange rate regime misses the boat and concludes that choice of exchange rate regime is likely to be of second order importance to the development of good fiscal, financial, and monetary institutions in producing macroeconomic success in emerging market countries and that 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. Another major study in this subject belong to Obtsfeld(2004) which claim that the measurable gains from financial integration appear to be lower for emerging markets than for higher-income countries, and appear to have been limited by recent crises. Obtsfeld identifies one factor limiting the gains from financial integration as the difficulty emerging economies face in resolving the open-economy trilemma which claim that many emerging economies cannot live comfortably either with fixed or with freely floating exchange rates. And finally, Stanley Fisher (2001) discusses the bipolar or two-corner solution view of intermediate policy regimes between hard pegs and floating are not sustainable and that use of pegged rates for countries open to international capital flows. Finally, I sum up with some concluding remarks.