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Unformatted text preview: January, 2001 Exchange Rate Regimes: Is the Bipolar View Correct? Stanley Fischer 1 . the choice of appropriate exchange rate regime, which, for economies with access to international capital markets, increasingly means a move away from the middle ground of pegged but adjustable fixed exchange rates towards the two corner regimes of either flexible exchange rates or a fixed exchange rate supported, if necessary, by a commitment to give up altogether an independent monetary policy. Lawrence H. Summers (2000), p. 8. [I]ntermediate solutions are more likely to be appropriate for many countries than are corner solutions Jeffrey A. Frankel (1999), p. 30. Despite their heterogeneity, EMs [Emerging Market countries] tend to share a common characteristic they appear to be reluctant to let their currencies fluctuate. Guillermo A. Calvo and Carmen M. Reinhart (2000), p. 5. Each of the major international capital market-related crises since 1994 Mexico, in 1994, Thailand, Indonesia and Korea in 1997, Russia and Brazil in 1998, and Argentina and Turkey in 2000 has in some way involved a fixed or pegged exchange rate regime. At the same time, countries that did not have pegged rates among them South Africa, Israel in 1998, Mexico in 1998, and Turkey in 1998 avoided crises of the type that afflicted emerging market countries with pegged rates. Little wonder, then, that policymakers involved in dealing with these crises have warned strongly against the use of pegged rates for countries open to international capital flows. That warning has tended to take the form of advice that intermediate policy 1 International Monetary Fund. This paper was prepared for delivery as the Distinguished Lecture on Economics in Government, jointly sponsored by the American Economic Association and the Society of Government Economists, at the meetings of the American Economic Association, New Orleans, January 6, 2001. I am grateful to my colleagues at the IMF for discussion of these issues, particularly to Ratna Sahay, Grace Juhn, and Paolo Mauro for their assistance, and Robert Chote, Dan Citrin, David Goldsbrough, and - 2 - aea01.01.doc;01/10/01;11:04 AM regimes between hard pegs and floating are not sustainable. This is the bipolar or two- corner solution view, which is the subject of this lecture. Figure 1 shows the change in the distribution of exchange rate arrangements among IMF members during the 1990s. The specification of exchange rate categories is taken from the IMFs Annual Report 2000 (pp 141-143), with the assignment of countries to particular categories being based on the IMF staffs view of the de facto exchange rate arrangement in place on the relevant date....
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