Distinguished Lecture on Economics in Government Exchange Rate Regimes: Is the Bipolar View Correct?

fixed or pegged exchange rate regime. At the same time, countries that did not have pegged rates—among them South Africa, Israel in 1998, Mexico in 1998, and Turkey in 1998—avoided crises of the type that afflicted emerging market countries with pegged rates. Little wonder, then, that policymakers involved in dealing with these crises have warned strongly against the use of adjustable peg and other soft peg exchange rate regimes for countries open to international capital flows. That warning has tended to take the form of the bipolar, or corner solution, view, which is that countries need to choose either to peg their currencies hard (for instance, as in a currency board), or to allow their currencies to float, but that intermediate policy regimes between hard pegs and floating are not sustainable. 1 Figure 1 shows the change in the distribution of exchange rate arrangements of the IMF’s member countries between 1991 and 1999. The three categories shown are derived from a more detailed classification of de facto exchange regimes