Abstract

The trend toward greater exchange rate flexibility for developing and transition countries is a prominent theme in the recent evolution of the international monetary system. As detailed in International Monetary Fund (1997), there has been a marked shift away from single-currency pegs since the early 1980s, as described by the official classification that distinguishes between pegged rates, limited flexibility, and more flexible arrangements. In 1975, 87 percent of developing countries had some type of pegged exchange rate, while only 10 percent had flexible rates (the remaining 3 percent being accounted for by the “limited flexibility” category); by 1985. the proportions were 71 percent and 25 percent, respectively; and by 1996, the proportions were 45 percent and 52 percent. It is noteworthy, however, that a number of countries that officially report their exchange rate as “flexible” have exhibited remarkable exchange rate stability against the U.S. dollar, including a number of Southeast Asian currencies prior to the recent crisis in the region. Thus, the movement to de facto exchange rate flexibility is somewhat less than the movement de jure.

Policy Options for Countries Seeking Exchange Rate Flexibility
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