European Central Bank

Exchange Rate Regimes for Emerging Market Economies – European Central Bank (2005)

This article draws attention to the fact that country-specific characteristics determine the most suitable regime for a country. Consequently, no single exchange rate regime will be the most appropriate for all countries, nor for any country all of the time.

The article highlights the interactive relationship between an exchange rate regime and the wider policy framework, particularly the disciplining role of the regime. Issues of relevance are discussed for each broad category of regime: floating, hard peg and intermediate.

1. Introduction

The current debate distinguishes between:

1.“corner” regimes (in reference to A) floating rate and B) hard peg regimes at either end of the continuum of regimes) and

2. “intermediate” or “soft peg regimes (defined by default as the C) remainder.

Classification of corner and intermediate exchange rate regimes

Corner regimes comprise:

• Hard peg regimes, consisting of a) currency board arrangements, under which the monetary authorities pledge to sell foreign currency for domestic currency on demand at a fixed rate, and back the domestic currency with foreign currency for this purpose, and b) the unilateral official adoption of a foreign currency e.g. dollarisation or euroisation. Note that, for the purposes of this article, the term “dollarisation” will be used as a catch-all word for the latter type of regime.

• Floating rate regimes, consisting of independent floats and managed floats. Under both types of regime, intervention may occur, but there is no explicit and officially announced commitment. Under independent floats, any intervention is solely to smooth market movements and provide for more orderly market conditions. Under managed floats, intervention may be used to influence the direction of change of the exchange rate, but without a specific exchange rate in mind.

• Intermediate (or soft peg) regimes are those...