The Economics of Exchange‐Rate Regimes: A Review Essay

Abstract

The exchange‐rate regime issue has taken centre‐stage in discussions of international economic policy. Much of the profession appears to have been converted to ‘the hypothesis of the vanishing middle regime’; for countries well‐integrated into world capital markets, there is little, if any, middle ground between floating exchange rates and monetary unification. This paper considers the exchange‐rate‐regime issue in the context of recent books on the subject by W. Max Corden and Morris Goldstein. Both authors prescribe managed floating exchange rates, supplemented with inflation targeting, for emerging‐market economies. Under managed floating, and with a credible monetary policy, the public finances in order, and strengthened debt management and prudential regulation, the exchange rate is free to act as a market gauge for assessing policies and as a mode of conflict resolution. Both authors also argue, however, that no exchange‐rate regime is a Holy Grail. Ultimately, a credible exchange‐rate regime depends upon the trust evoked by governments. There is no exchange‐rate regime, whether of the managed‐floating or hard‐fix variety, that can eradicate a history of failed stabilisation attempts.