Working Paper: CEPR ID: DP2723
Authors: Charles Wyplosz
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 Codes: E30; F30; F40; G20; O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate stability (F31) | trade integration (F15) |
| financial repression (G28) | economic growth (O49) |
| trade openness (F43) | economic growth (O49) |
| exchange rate stability (F31) | level playing field for international competition (L49) |