How Optimal are the Extremes? Latin American Exchange Rate Policies during the Asian Crisis

Abstract

One common feature of the countries most affected by the Asian crisis and its shockwaves — such as Thailand, Malaysia, Indonesia, the Republic of Korea and Brazil — is that they had exchange rate systems that in different versions were closer to pegged systems than to floating systems (they were often called ‘soft pegs’). Countries with exchange rate bands, such as Israel, Chile and Colombia also suffered, while floating countries such as Australia, New Zealand and Mexico apparently fared better. Based on this, many observers have concluded that intermediate exchange rate systems are dangerous and that optimality is located at the extremes. This chapter evaluates this conclusion by analyzing the experiences of three different exchange rate systems: Those of Argentina, Chile and Mexico, which have diverging exchange rate policies, at least formally. 1 These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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