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Kyong Mo Huh, Ms. Benedicte Vibe Christensen, Peter J. Quirk, and Toshihiko Sasaki

Abstract

In recent years, an increasing number of developing countries have adopted market-determined floating exchange rates. This development has represented a significant step forward in the evolution toward exchange rate flexibility that has taken place in the developing country group since the adoption of generalized floating by industrial countries in 1973.

Kyong Mo Huh, Ms. Benedicte Vibe Christensen, Peter J. Quirk, and Toshihiko Sasaki

Abstract

In recent years, an increasing number of developing countries have adopted market-determined floating exchange rates. This development has represented a significant step forward in the evolution toward exchange rate flexibility that has taken place in the developing country group since the adoption of generalized floating by industrial countries in 1973. Before 1983 there had been only isolated instances of floating by developing countries in the context of the post-par value regime. Lebanon has had such a floating exchange rate for several years. Other experiences with market-determined unitary floating rates were quite short lived, lasting for less than one year (Mexico, 1976/77; Argentina, 1978; Costa Rica, 1981; and Chile, 1982).

Kyong Mo Huh, Ms. Benedicte Vibe Christensen, Peter J. Quirk, and Toshihiko Sasaki

Abstract

Fifteen developing country members of the Fund have adopted market-related floating exchange arrangements.4 Members adopting floating exchange rate systems have represented a variety of economic structures and per capita income levels within the group of developing countries, and have also been geographically dispersed (see Table 6 in the Appendix). However, one fairly general characteristic has been the openness of their economies to trade, and therefore the critical importance of the exchange rate. The depth of the financial systems in the economies under study has also varied, broadly with per capita income.

Kyong Mo Huh, Ms. Benedicte Vibe Christensen, Peter J. Quirk, and Toshihiko Sasaki

Abstract

Institution of floating arrangements in the spot market may be important in setting the stage for the establishment of cover facilities that do not involve an official guarantee of an exchange rate and the attendant assumption of exchange risk and possibilities for large losses by the central bank. It may be difficult for a country to establish a forward foreign exchange market in which the exchange rate is market-determined if the spot exchange rate is fixed. One reason for this is that the judgments on the future movement of the spot rate which are an essential ingredient of a forward market become those of predicting the course of official action, and the scope for uncertainty and for abuse of inside information is therefore wide. The setting up of a forward market is, on the other hand, a difficult process that may require close monitoring and sponsorship by the central bank, in particular to ensure that adequate technical information is available to potential participants.

International Monetary Fund
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.
Ms. Anastasia Guscina, Mr. Guilherme Pedras, and Gabriel Presciuttini
International bond issuance by debut issuers has risen in recent years. The uptick was a result of both demand and supply factors. The search for yield and demand for portfolio diversification have resulted in demand-driven easy financing conditions. At the same time, rising financing needs for many debut issuers, coupled with reduced access to concessional financing, relatively undeveloped domestic markets, and a favorable interest rate environment have made international bonds an attractive financing alternative for many countries. As bonds issued in the international markets are typically denominated in hard currencies, have large volumes and a bullet structure, exposure to exchange rate and refinancing risk has increased. Therefore, risk-mitigating policy actions are needed to prepare for redemption, support debt sustainability, and secure adequate debt management capacity.
Kyong Mo Huh, Ms. Benedicte Vibe Christensen, Peter J. Quirk, and Toshihiko Sasaki

Abstract

Most of the developing countries that have adopted floating exchange rates have at the same time pursued supporting monetary and fiscal policies and have liberalized exchange and trade restrictions. Isolating the separate effects of floating is therefore a difficult task. Moreover, because the experience with flexible exchange rates in most of the countries surveyed is recent, inferences that may be drawn must necessarily be regarded as tentative, both because the full effects of flexibility take time to work through an economy and because most of the relevant macroeconomic data are preliminary. These qualifications apply with less force, however, to an examination of the effects of floating on the exchange market itself, that is, on the variables most directly affected by the exchange rate regime. Such an analysis is also helped by the fact that data for exchange rates and certain important exchange market transactions become available with relatively short lags.

Kyong Mo Huh, Ms. Benedicte Vibe Christensen, Peter J. Quirk, and Toshihiko Sasaki

Abstract

The experience with flexible exchange arrangements in the specific form of floating exchange rates in developing countries since the advent of generalized floating by industrial countries in 1973 is relatively limited, although in recent years an increasing number of developing country Fund members have adopted such systems. The early experience indicates that floating exchange rate systems can function satisfactorily in developing countries with relatively diverse economic structures, despite the limited depth of their financial systems. However, the exchange arrangements have to be adapted to the institutional strengths and weaknesses of individual countries. Most particularly, these freely floating exchange market arrangements have to be supported by the sustained pursuit of appropriate domestic economic policies to ensure their efficient operation over time. Such arrangements are often also the only alternative to restrictions, arrears, and controls to insulate the balance of payments from domestic economic mismanagement. However, from an efficiency viewpoint, it must be stressed that a floating exchange rate cannot substitute for appropriate economic policies.