Fixing for Your Life

Nearly all the currency crises of the 1990s took place against a backgroundof exchange rate regimes that have been characterized—after the fact— as soft pegs.1 This has led many analysts to conclude that “the peg did it ” and that emerging markets should “just say no ” to fixed exchange rates. This advice seems paradoxical in light of the fact that most emerging markets have precarious access to international capital markets during the best of times (and none during the worst), and that access is often contingent on the stability of these nations ’ currencies. This paper argues that in fact “floating ” exchange rates are far from a panacea for emerging markets and that this policy advice misses a number of important real-world considerations that are crucial for developing countries. We present evidence that emerging economies are indeed very different from developed economies in several key respects that are bound to play an impor-tant role in the choice of exchange rate regime. In emerging market countries, devaluations—or large depreciations for that matter—are contractionary, and the adjustments in the current account are far more acute and abrupt. Currenc