International Monetary Fund. External Relations Dept.
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Mr. Charalambos G Tsangarides, Mr. Carlo Cottarelli, Mr. Gian M Milesi-Ferretti, and Mr. Atish R. Ghosh
Exchange rate analysis lies at the center of the IMF's surveillance mandate and policy advice, as well as in the design of IMF-supported programs, and IMF staff are called upon to analyze a wide variety of exchange rate issues in various member countries, both small and large, from the least economically developed to the most advanced, and from those whose currencies circulate only locally to those whose currencies are of global importance. Each year, IMF staff produce dozens of studies on exchange rate issues, some published by the IMF, others in various professional journals or books. This book aims to give a flavor of the topics the IMF staff typically examine under the broad rubric of exchange rate analysis, encompassing several topics: determination and impact of the real exchange rate, assessing competitiveness and the equilibrium real exchange rate in specific countries or country groups, and considerations in the choice of exchange rate regime.
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
In this paper, various policy instruments at the disposal of national governments for dealing with the problem of disruptive international capital flows or, more generally, the problem of temporary and reversible payments imbalances, are passed in review. The instruments examined include: separate (dual) exchange markets for capital and current transactions; taxes and subsidies affecting capital transactions or income from capital; official intervention in forward exchange markets; monetary or interest rate policies (including the fiscal-monetary mix); official financing or use of reserves; and floating unitary exchange rates and wider margins. Attention is focused on the device of dual exchange markets, which is evaluated in comparison with each of the other approaches from the standpoint of allocative effects, scope, enforceability, flexibility, and so on. Dual markets, if conducted on appropriate lines, are found to compare favourably overall with most of the other policies, except for floating unitary rates. The paper closes with a suggestion for a system of dual exchange markets with floating rates (subject to appropriate official intervention) on both markets.