Experience of and Lessons from Exchange Rate Regimes in Emerging Economies

Abstract

The paper reviews recent trends in thinking on exchange rate regimes. It begins by classifying countries into regimes, noting the distinction between de facto and de jure regimes, but also noting the low correlation among proposed ways of classifying the former. The advantages of fixed exchange rates versus floating are reviewed, including the recent evidence on the trade-promoting effects of currency unions. The next topic is the framework for tallying up the pros and cons: the traditional Optimum Currency Area criteria, as well as some new criteria from the experiences of the 1990s. A section on the rapid rise and fall of the Corners Hypothesis notes its lack of theoretical foundations. A section on empirical evidence regarding the economic performance of different regimes notes sensitivity to the classification scheme. A listing of possible nominal anchors alongside exchange rates observes that each candidate has its own vulnerability, leading to the author's proposal to Peg the Export Price (PEP). The concluding section offers some implications for East Asia.