Exchange Rate Regimes: Some Lessons from Postwar Europe

Abstract

Can Europe's post-war experience with fixed exchange rates be useful for today's emerging market countries? A new conventional wisdom suggests that the answer is negative, that in today's world of huge capital flows the only choice is between freely floating exchange rates and hard pegs. The Paper argues to the contrary, that Europe's strategy has much to recommend it. Most European countries have identified trade integration as a key objective, and considered that exchange rate stability was a prerequisite for establishing a level-playing field. The survival of the regime was made possible by widespread financial repression. There is no evidence that such a strategy stunted growth, quite the contrary in fact. Nor is it the case that this strategy is impossible today for other small open economies.

Keywords: Currency crises, exchange rate regimes, liberalization, sequencing

JEL Classification: E30, F30, F40, G20, O10