Currency Regimes Revisited

Abstract

Abstract The present system of flexible exchange rates has not been too successful in sustaining output growth and containing inflation rates in the developed world. This has led many economists and policymakers to float the idea of reviving the Bretton Woods system of international currency management. This has also revived the debate over the relative efficacy of pegged and floating exchange rates in the developing world in promoting employment and growth and in stabilizing output and income fluctuations. The initial success and subsequent crisis in the Euro zone have also reopened the issue of an optimum currency area. This chapter makes a summary comparison between a pegged exchange rate regime, and broadly speaking, a flexible exchange rate regime. However, it is difficult to make a once for all choice in favour of a particular exchange rate regime. Neither the theory nor the country experiences are very conclusive in this regard. Both regimes have their benefits and costs. Suitability of a particular regime, however, depends on the policy target of a country.