Exchange rate regimes of developing countries: Global context and individual choices

This paper argues that, in analyzing the choice of exchange rate regimes in developing and transition countries in the present global economic context , it is essential to distinguish between those countries with substantial i nvolvement in international financial markets and those where involvement i s limited. For developing countries with important linkages to modem global capital markets, an important lesson of the recent crises in emerging mark et countries is that the requirements for sustaining pegged exchange rate r egimes have become significantly more demanding. For many emerging market c ountries, therefore, regimes that allow substantial actual exchange rate fl exibility are probably desirable. If supported by the requisite policy disc ipline and institutional structures, however, hard currency pegs may also b e appropriate for some of these countries. Beyond the emerging markets coun tries, for many developing countries with less linkage to global capital ma rkets, traditional exchange rate pegs and intermediate regimes are more via ble and retain important advantages. (C) 2001 Academic Press.