How should emerging economies float their currencies?

Economics of Transition Volume 10 (2) 2002, 365–392

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SHOULD EMERGING ECONOMIES FLOAT THEIR CURRENCIES? ��

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Table 1. Developing countries: officially reported exchange rate arrangements (in percent of total)

1976 1981 1986 1991 1996 1998

Pegged 86 75 67 57 45 41 US dollar 42 32 25 19 15 12 French franc 13 12 11 11 11 9 Other 7 4 4 3 4 8 SDR 12 13 8 5 2 3 Composite 12 14 18 20 14 9 Limited flexibility 3 10 5 4 3 2 Single 3 10 5 4 3 2 Cooperative - - - - - - More flexible 11 15 28 39 52 57 Set to indicators 6 3 4 4 2 - Managed floating 4 9 13 16 21 33 Independently floating 1 4 11 19 29 24 Number of countries 100 113 119 123 123 159

Source: IMF (1997).

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Table 2. Inflation in developing countries

Africa Asia Middle East and Europe

Western Hemisphere

1985 14.5 6.8 20.5 408.5 1986 15.1 8.3 20.1 51.7 1987 16.8 9.2 21.7 56.7 1988 21.3 13.8 26.1 501.7 1989 19.0 11.9 21.7 339.8 1990 15.4 6.5 22.1 443.9 1991 24.6 7.8 27.8 129.1 1992 47.1 8.6 26.5 109.1 1993 39.0 10.8 29.4 194.6 1994 54.7 16.0 37.3 200.3 1995 35.3 13.2 39.1 36.0 1996 30.2 8.3 29.6 21.2 1997 14.2 4.8 27.7 12.9 1998 10.8 7.7 27.6 9.9 1999 11.5 2.5 23.2 8.8 2000 13.6 1.9 19.2 8.1

Source: IMF, World Economic Outlook, 1993, 1996, 1999 and 2001.

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Table 3. Inflation performance under hard pegs and flexible rates Consumer Price Index (% change)

Countries 1995 1996 1997 1998 1999 2000 Currency board countries (G1) Argentina 1.6 0.0 0.3 0.7 –1.8 –0.7 Hong Kong 7.0 6.6 5.2 –1.6 –4.0 –2.0 Flexible rate countries Developed (G2) Australia 4.6 2.6 0.3 0.9 1.5 4.5 New Zealand 3.7 2.3 1.2 1.3 –0.1 2.5 Singapore 0.9 2.0 2.0 –1.5 0.7 1.0 Emerging (G3) Chile 8.2 6.6 6.0 4.7 2.3 4.5 Mexico 52.0 27.7 15.7 18.6 12.3 9.0

Source: IMF, International Financial Statistics, 2001.

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Table 4. Real performance under hard pegs and flexible rates

Real GDP growth (% change) Terms of trade (% change) Countries 1995 1996 1997 1998 1999 2000 1995 1996 1997 1998 1999

Currency board countries (G1)

Argentina –2.8 5.5 8.1 3.8 –3.4 –0.5 –5.7 1.9 2.2 –5.3 0.7 Hong Kong 3.9 4.5 5.0 –5.3 3.0 10.5 –1.6 1.0 0.7 1.2 –0.8 Flexible rate countries

Developed (G2) Australia 4.4 3.7 3.8 5.6 4.7 3.8 –3.5 –1.3 –1.9 3.4 5.3 New Zealand

4.3 3.6 2.2 –0.1 3.8 3.7 –0.3 –1.5 –1.0 –0.5 –2.3

Singapore 8.0 7.7 8.5 0.1 5.9 9.9 1.7 –0.2 0.0 0.0 0.3 Emerging (G3) Chile 10.6 7.4 7.4 3.9 –1.1 5.4 14.8 –16.6 3.8 –13.6 –4.5 Mexico –6.2 5.2 6.8 5.0 3.7 6.9 –2.8 2.8 –0.8 –2.5 4.0

Source: IMF, International Financial Statistics, 2001.

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Source: JPMorgan.

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How should emerging economies float their currencies?

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