The Mirage of Exchange Rate Regimes for Emerging Market Countries

42 Pages Posted: 3 Jul 2003 Last revised: 26 Oct 2022

See all articles by Guillermo A. Calvo

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Frederic S. Mishkin

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

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Date Written: June 2003

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.

Suggested Citation

Calvo, Guillermo A. and Mishkin, Frederic S., The Mirage of Exchange Rate Regimes for Emerging Market Countries (June 2003). NBER Working Paper No. w9808, Available at SSRN: https://ssrn.com/abstract=420322

Guillermo A. Calvo (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Frederic S. Mishkin

Columbia University - Columbia Business School, Finance ( email )

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National Bureau of Economic Research (NBER)

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