Fixing for Your Life

Guillermo A. Calvo, Carmen M. Reinhart

NBER Working Paper No. 8006
Issued in November 2000
NBER Program(s):International Finance and Macroeconomics

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.

download in pdf format
   (337 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w8006

Published: Calvo, G. (ed.) Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy? Cambridge, MA: MIT Press 2005.

Users who downloaded this paper also downloaded* these:
Calvo and Reinhart w7993 Fear of Floating
Edwards w17074 Exchange Rates in Emerging Countries: Eleven Empirical Regularities from Latin America and East Asia
Reinhart and Rogoff w8963 The Modern History of Exchange Rate Arrangements: A Reinterpretation
Calvo, Izquierdo, and Talvi w9828 Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons
Reinhart and Reinhart w9670 Twin Fallacies About Exchange Rate Policy in Emerging Markets
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us