Monetary Coordination Involving Developing Countries: The Need for a New Conceptual Framework

As the East Asian crisis has impressively shown, sudden U-turns in capital flows and volatile exchange rates must today be identified as major sources of instability, even in a favourable world economic climate. Countries not engaged in a regional monetary coordination arrangement and therefore unilaterally exposed to these instabilities fall back on a combination of monetary and fiscal policies to avert depreciation, and if — as is regrettably too often the case — the struggle is lost, on competitive devaluations. The balance-sheet effects of devaluations and increased domestic interest rates depress domestic income generation and result in a deterioration of public budgets. Moreover, this policy mix has an extremely deleterious impact on regional integration, as the case of Mercosur compellingly indicates.