## Exchange Rate Regimes and the Stability of the International Monetary System

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**Canonical URL:** [Exchange Rate Regimes and the Stability of the International Monetary System](https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/op/270/_op270.pdf)

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### Overview
- The paper reviews the stability of the overall system of exchange rates along three dimensions:
  - Do individual countries’ choice of exchange rate regime help them achieve their domestic macroeconomic goals?
  - Does this choice of regime facilitate the country’s interaction with the rest of the system?
  - Is the system as a whole stable?
- This paper is the first to analyze all three dimensions together, building on prior work (Mussa and others, 2000; Rogoff and others, 2004).
- Prior positions summarized:
  - Mussa and others (2000) advocated a bipolar view—hard pegs or free floats, avoiding intermediate regimes.
  - Rogoff and others (2004) advocated flexible regimes, particularly for emerging market economies (EMEs).
- This paper’s comprehensive empirical analysis produces a nuanced message balancing benefits and costs across regime types.

### Major empirical findings on exchange rate regimes
- Pegged and intermediate regimes:
  - Pegged regimes provide a useful nominal anchor without compromising growth.
  - Intermediate regimes are associated with low nominal volatility and higher economic growth, especially for EMEs.
  - Both intermediate and pegged regimes are associated with deeper trade integration, which is growth-enhancing.
- Floating regimes:
  - Floating regimes are associated with smoother external adjustment.
  - Floating regimes are associated with lower susceptibility to financial crises.
- Trade-offs:
  - There is no single regime that is uniformly superior; each regime presents trade-offs between nominal stability, growth, trade integration, external adjustment, and crisis vulnerability.
- Conditional recommendation for nonsystemically important countries:
  - The choice of exchange rate regime can be tailored to particular economic challenges.
  - Countries opting for less flexible regimes should ensure strong macroeconomic fundamentals to minimize the risk of potentially contagious crises.

### Sources of systemic stress identified
- The paper identifies three related potential sources of instability:
  1. Reserves accumulation by EMEs:
     - The recent crisis could heighten EMEs’ incentives to self-insure via reserves accumulation.
     - This could create pressures for competitive depreciations, exacerbate global imbalances, and—if accumulated against persistent U.S. deficits—ultimately undermine confidence in the reserve currency status of the dollar.
     - Greater access to IMF resources, including precautionary instruments, or to a synthetic reserve asset (such as the Special Drawing Right) could help prevent this outcome.
  2. Persistence of external imbalances under less flexible regimes:
     - External imbalances are more persistent under less flexible exchange rate regimes.
     - Greater exchange rate flexibility in key surplus countries, together with the full range of supporting policies envisaged in the IMF-sponsored Multilateral Consultations for other countries (IMF, 2007), would tend to reduce systemic risks.
  3. Continued U.S. deficits and reserve currency confidence:
     - Continued U.S. deficits over the long term could eventually undermine confidence in the dollar’s reserve currency status.
     - Although a sudden and destabilizing stock adjustment in reserves composition seems unlikely, appropriate exit policies from the crisis that credibly narrow future deficits would provide additional confidence in the dollar’s reserve currency status.

### Policy implications and recommendations
- For nonsystemically important countries:
  - Tailor exchange rate regime choice to country-specific economic challenges.
  - Ensure strong macroeconomic fundamentals if choosing less flexible regimes to reduce crisis risk.
- For systemically important (surplus or reserve-currency) countries:
  - Factor in how regime choice can moderate or exacerbate destabilizing global imbalances.
  - Consider greater exchange rate flexibility in key surplus countries as a means to reduce systemic risk.
- For the IMF and international policy architecture:
  - The IMF can contribute to system stability by providing enhanced mechanisms to meet the evident underlying demand for country insurance.
  - Options include greater access to IMF resources, precautionary instruments, or broader use of a synthetic reserve asset such as the Special Drawing Right.

*Source: INTERNATIONAL MONETARY FUND, Occasional Paper 270 — Exchange Rate Regimes and the Stability of the International Monetary System, Atish R. Ghosh, Jonathan D. Ostry, and Charalambos Tsangarides (2010).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/op/270/_op270.pdf_