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Yes, you can access Moving to a Flexible Exchange Rate : How, When, and How Fast? by Rupa Duttagupta, Cem Karacadag, and Gilda Fernandez in PDF and/or ePUB format. We have over one million books available in our catalogue for you to explore.

Information

Publisher

INTERNATIONAL MONETARY FUND

Year

2006

ISBN

9781589064768

Moving to a Flexible Exchange Rate How, When, and How Fast?

Some countries have made the transition from fixed to flexible exchange rates gradually and smoothly, by adopting intermediate types of exchange rate regimes—soft pegs, horizontal and crawling bands, and managed floats—before allowing the currency to float freely. (See Box 1 for a list of exchange rate regimes.) Other transitions have been disorderly—that is, characterized by a sharp depreciation of the currency. A large share of the exits to flexible exchange rate regimes during 1990–2002 were disorderly (Box 2). But whether an exit from a fixed rate is orderly or not, it is always complicated.

Box 1. Types of exchange rate regimes

Exchange arrangements with no separate legal tender

The currency of another country circulates as the sole legal tender (formal dollarization), or the member belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. Adopting such regimes implies the complete surrender of the monetaz1ry authorities’ independent control over domestic monetary policy.

Currency boards

A monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. This implies that domestic currency will be issued only against foreign exchange and that it remains fully backed by foreign assets, eliminating traditional central bank functions, such as monetary control and lender of last resort, and leaving little scope for discretionary monetary policy. Some flexibility may still be afforded, depending on how strict the banking rules of the currency board arrangement are.

Other conventional fixed-peg arrangements

The country (formally or de facto) pegs its currency at a fixed rate to another currency or a basket of the currencies of major trading or financial partners, weighted to reflect the geographical distribution of trade, services, or capital flows. The parity is not irrevocable. The exchange rate may fluctuate within narrow margins of less than ±1 percent around a central rate, or the maximum and minimum values of the exchange rate may remain within a narrow margin of 2 percent for at least three months. The monetary authority stands ready to maintain the fixed parity through direct intervention (sale/purchase of foreign exchange in the market) or indirect intervention (aggressive use of interest rate policy, imposition of foreign exchange regulations, moral suasion, or intervention by other public institutions). Independence of monetary policy, though limited, is greater than under exchange arrangements with no separate legal tender and currency boards because traditional central banking functions are still possible, and the monetary authority can adjust the level of the exchange rate, although relatively infrequently.

Pegged exchange rates within horizontal bands

The value of the currency is maintained within certain margins of fluctuation of at least ±1 percent around a fixed central rate, or the margin between the maximum and minimum values of the exchange rate exceeds 2 percent. The exchange rate mechanism (ERM) of the European Monetary System (EMS), which was replaced with ERM II on January 1, 1999, is an example of this type of peg. There is a limited degree of monetary policy discretion, depending on the band’s width.

Crawling pegs

The currency is adjusted periodically in small amounts at a fixed rate or in response to changes in selective quantitative indicators, such as past inflation differentials vis-à-vis major trading partners, differentials between the inflation target and expected inflation in major trading partners, and so forth. The rate of crawl can be set to generate inflation-adjusted changes in the exchange rate (backward looking), or it can be set at a preannounced fixed rate and/or below the projected inflation differentials (forward looking). A crawling peg imposes the same kinds of constraints on monetary policy as a fixed peg.

Exchange rates within crawling bands

The currency is maintained within fluctuation margins of at least ±1 percent around a central rate, or the margin between the maximum and minimum values of the exchange rate exceeds 2 percent, and the central rate or margins are adjusted periodically at a fixed rate or in response to changes in selective quantitative indicators. The degree of...

Cover Page
Title Page
Copyright Page
Preface
Moving to a Flexible Exchange Rate How, When, and How Fast?
Biography