The Choice of Exchange Rate Regime in Emerging-Market and Transition Economies

Abstract

The exchange rate regime comprises the exchange rate arrangement and a number of complementary policies, including possible capital controls and monetary policy. The normative choice of an appropriate exchange rate regime must take into account many factors. Fixed exchange rates facilitate international trade, but may lead to more variability of output and employment. For emerging-market and transition economies, other factors such as export competitiveness, disinflation policies, maintenance of low inflation, and the credibility and administrative capacity of the authorities may be equally important. These features differ across countries and change over time. Empirical studies suggest that numerous factors are of importance for the choice of exchange rate regime, but also that the effects of the choice are difficult to pin down.