 Fixing for your lifeCarmen Reinhart and Guillermo Calvo MPRA Paper from University Library of Munich, Germany Abstract: The Asian crisis took place against a background of exchange rate regimes that were characterized as soft pegs. This has led many analysts to conclude that “the peg did it” and that emerging markets (EMs) should “just say no” to pegged exchange rates. We present evidence that EMs are very different from developed economies in key dimensions that play a key role when it comes to the choice of exchange rate regime--floating for EMs is no panacea. In EMs currency crashes are contractionary, the adjustments in the current account are far more acute. Credibility and market access, as captured in the behavior of credit ratings and interest rates, is adversely affected by devaluations or depreciations. Exchange rate volatility is more damaging to trade and the passthrough from exchange rate swings to inflation is far higher in EMs. These differences between emerging and developed economies may explain EMs reluctance to tolerate large exchange rate movements. In a simple framework we illustrate why large exchange rate swings are feared when access to international credit may be lost. Keywords: financial; crisis; exchange; rate; passthrough; volatility; credit; ratings; banking; downgrades (search for similar items in EconPapers) Published in Susan Collins and Dani Rodrik, eds., Brookings Trade Forum 2000 Washington, DC: Brookings Institution (2000): pp. 1-39 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:13873 Access Statistics for this paper More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC. |
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