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  5. The Mirage of Exchange Rate Regimes for Emerging Market Countries

Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

The Mirage of Exchange Rate Regimes for Emerging Market Countries

  • Guillermo A. Calvo
  • Frederic S. Mishkin
Journal of Economic Perspectives
vol. 17, no. 4, Fall 2003
(pp. 99–118)
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Abstract

This paper argues that much of the debate on choosing an exchange rate regime misses the boat. It begins by discussing the standard theory of choice between exchange rate regimes, and then explores the weaknesses in this theory, especially when it is applied to emerging market economies. It then discusses a range of institutional traits that might predispose a country to favor either fixed or floating rates, and then turns to the converse question of whether the choice of exchange rate regime may favor the development of certain desirable institutional traits. The conclusion from the analysis is that the choice of exchange rate regime is likely to be of second order importance to the development of good fiscal, financial, and monetary institutions in producing macroeconomic success in emerging market countries. This suggests that less attention should be focused on the general question whether a floating or a fixed exchange rate is preferable, and more on these deeper institutional arrangements. A focus on institutional reforms rather than on the exchange rate regime may encourage emerging market countries to be healthier and less prone to the crises that we have seen in recent years.

Citation

Calvo, Guillermo, A., and Frederic S. Mishkin. 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries." Journal of Economic Perspectives, 17 (4): 99–118. DOI: 10.1257/089533003772034916

JEL Classification

  • E52 Monetary Policy
  • F32 Current Account Adjustment; Short-term Capital Movements
  • F33 International Monetary Arrangements and Institutions
  • O19 International Linkages to Development; Role of International Organizations
  • P33 Socialist Institutions and Their Transitions: International Trade, Finance, Investment, Relations, and Aid
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