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Fixing for your life

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  • Reinhart, Carmen
  • Calvo, Guillermo

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.

Suggested Citation

  • Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:13873
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    More about this item

    Keywords

    financial crisis exchange rate passthrough volatility credit ratings banking downgrades;

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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