Moving to a Flexible Exchange Rate: How, When, and How Fast?

Rupa Duttagupta, Gilda Fernandez and Cem Karacadag 

International Monetary Fund (IMF) , 2006

A fixed exchange rate, which pegs the value of a currency to a strong foreign currency like the dollar or the euro, has many advantages, particularly for developing countries seeking to build confidence in their economic policies. And such pegs have been associated with lower inflation rates. However, countries with fixed exchange rates seem to be more vulnerable to currency crises, as well as to twin currency and banking crises, than those with more flexible regimes. Indeed, as economies mature and become more closely tied with international financial markets, the benefits of exchange rate flexibility appear to increase.

"The timing and priority accorded to each of these areas naturally vary from country to country depending on initial conditions and economic structure. "

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