REGIMENES CAMBIARIOS PARA ECONOMIAS EMERGENTES

• Published in: Cuadernos de economía (Santiago) 2000-04, Vol.37 (110), p.101-137
• Main Authors: Larraín B., Felipe, Velasco, Andrés
• Format: Article
• Language: Spanish
• ISSN: 0716-0046; 0717-6821

Which exchange rate arrangement should developing countries adopt? This question has been given new urgency by the 1997-98 Asian crisis, with its offshoots in Eastern Europe and Latin America. Adjustable or crawling pegs were in place in almost every country that experienced serious difficulties recently: first in Thailand, Indonesia, and Korea, then in Russia, Brazil and Ecuador. The pressure brought by massive capital flow reversals and weakened domestic financial systems was too much to bear, even for countries that followed reasonably sound macro policies and had seemingly plentiful reserves. The failure of these adjustable or crawling pegs has caused a scramble for alternatives. Much recent thinking reflects what some analysts have termed "the law of the excluded middle": there is apparently no intermediate exchange rate regime upon a time economists suitable for emerging markets. Hard pegs or floats are, allegedly, the only options. It remains under sharp debate, however, which countries should adopt which polar system. This paper reviews some empirical evidence on the recent performance of alternative exchange rate arrangements, and examines the concrete circumstances under which each polar regime should be adopted. To do that, it explores the options of dollarization, currency boards, regional currency areas, and flexible rates. The paper concludes that, although one particular regime may not fit all countries, there is a strong case for floating exchange rates for emerging markets.