Big and Small Currencies : The Regional Connection
This paper is an exploration of the regional dimension of the new international financial architecture in the light of the debate on "two corner" solutions for exchange rate regimes, which advocates either free floating or currency boards (or dollarization) as the only sustainable regimes. The first section deals with the evolution of the international monetary system (IMS) after 1997-1998 currency crises in emerging countries, as compared with the situation which prevailed prior to the Asian crisis. De facto exchange rate regimes are examined through the implementation of a new econometric methodology based on a method of moments. The implicit pegs of 111 currencies are estimated on weekly data over two periods (pre and post crises). Our results show that the proportion of currencies with de facto pegs on the US dollar is much higher and persistent than the share of the official pegs reported by the IMF. This is the case even after the Asian crisis, which suggests that the current system is much more resilient to shocks than it is usually thought, at least in the short run. Conversely, free floating appear much less frequent than claimed officially, whereas pegs on the euro are a significant minority. We conclude that the IMS is not moving towards a generalized free floating system, and it is still far from being organized around equally sized currency blocks.The second section explores the possibility of regional solutions for exchange-rate regimes.
Exchange rate regimes; currency blocks; emerging countries
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