Exchange Rate Regimes of Developing Countries: Global Context and Individual Choices

Abstract

This paper argues that, in analyzing the choice of exchange rate regimes in developing and transition countries in the present global economic context, it is essential to distinguish between those countries with substantial involvement in international financial markets and those where involvement is limited. For developing countries with important linkages to modern global capital markets, an important lesson of the recent crises in emerging market countries is that the requirements for sustaining pegged exchange rate regimes have become significantly more demanding. For many emerging market countries, therefore, regimes that allow substantial actual exchange rate flexibility are probably desirable. If supported by the requisite policy discipline and institutional structures, however, hard currency pegs may also be appropriate for some of these countries. Beyond the emerging markets countries, for many developing countries with less linkage to global capital markets, traditionalexchange rate pegs and intermediate regimes are more viable and retain important advantages. J. Japan. Int. Econ., March 2001, 15(1), pp. 68–101. Research Department, International Monetary Fund, Washington, DC, 20431. Copyright 2001 Academic Press.Journal of Economic Literature Classification Numbers: F31, F33, F41.