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Rupa Duttagupta, Mr. Cem Karacadag, and Mrs. Gilda C Fernandez

Abstract

A growing number of countries are adopting flexible exchange rate regimes because flexibility offers more protection against external shocks and greater monetary independence. Other countries have made the transition under disorderly conditions, with the sharp depreciation of their currency during a crisis. Regardless of the reason for adopting a flexible exchange rate, a successful transition depends on the effective management of a number of institutional and operational issues. The authors of this Economic Issue describe the necessary ingredients for moving to a flexible regime, as well as the optimal pace and sequencing under different conditions.

Guy Debelle, Mr. Miguel A Savastano, Mr. Paul R Masson, and Mr. Sunil Sharma

Abstract

Inflation distorts prices, erodes savings, discourages investment, stimulates capital flight, inhibits growth, and makes economic planning a nightmare. During the past decade, several advanced economies have taken a new approach to the age-old problem of controlling inflation through monetary policy known as "inflation targeting." This pamphlet explains the requirements of putting the new policy in place, the experience of the countries that have tried it, and whether it has applicability to developing countries.

International Monetary Fund

Abstract

This paper examines the recent evolution of exchange rate policies inthe developing world. It looks at why so many countries have made a transition from fixed or "pegged" exchange rates to "managed floating"currencies. It discusses how economies perform under different exchangerate arrangements, issues in the choice of regime, and the challenges poised by a world of increasing capital mobility, especially when bankingsectors are inadequately regulated or supervised.

Mr. Jahangir Aziz and Mr. Francesco Caramazza

Abstract

Analysts agree that “getting the exchange rate right” is essential for economic stability and growth in developing countries. Over the past two decades, many developing countries have shifted away from fixed exchange rates (that is, those that peg the domestic currency to one or more foreign currencies) and moved toward more flexible exchange rates (those that determine the external value of a currency more or less by the market supply and demand for it). During a period of rapid economic growth, driven by the twin forces of globalization and liberalization of markets and trade, this shift seems to have served a number of countries well. But as the currency market turmoil in Southeast Asia has dramatically demonstrated, globalization can amplify the costs of inappropriate policies. Moreover, the challenges facing countries may change over time, suggesting a need to adapt exchange rate policy to changing circumstances.

Mr. Jahangir Aziz and Mr. Francesco Caramazza

Abstract

This paper examines the recent evolution of exchange rate policies in the developing world. It looks at why so many countries have made a transition from fixed or "pegged" exchange rates to "managed floating" currencies. It discusses how economics perform under different exchange rate arrangements, issues in the choice of regime, and the challenges poised by a world or increasing capital mobility, especially when banking sectors are inadequately regulated or supervised.

International Monetary Fund

Abstract

Analysts agree that “getting the exchange rate right” is essential for economic stability and growth in developing countries. Over the past two decades, many developing countries have shifted away from fixed exchange rates (that is, those that peg the domestic currency to one or more foreign currencies) and moved toward more flexible exchange rates (those that determine the external value of a currency more or less by the market supply and demand for it). During a period of rapid economic growth, driven by the twin forces of globalization and liberalization of markets and trade, this shift seems to have served a number of countries well. But as the currency market turmoil in Southeast Asia has dramatically demonstrated, globalization can amplify the costs of inappropriate policies. Moreover, the challenges facing countries may change over time, suggesting a need to adapt exchange rate policy to changing circumstances.

Mr. Eduardo Borensztein and Mr. Andrew Berg

Abstract

Analyzes the costs and benefits of full dollarization, or the adoption by one country of another country’s currency. Potential advantages include lower borrowing costs and deeper integration into world markets. But countries lose the ability to devalue, and become dependent on the U.S. Compares with currency board option.