The Evolution of Thought on Intermediate Exchange Rate Regimes

Abstract

This article traces the origins and evolution of proposals for exchange-rate regimes intermediate between fixed and floating rates. The origins are traced to Keynes's interwar writings. Keynes's ideas were revived in the 1960s literature on the (wide) band proposal and crawling peg and developed in the 1970s by the literatures on the reference rate proposal and optimal peg. The target zone proposals of the 1980s combined the band proposal and the crawling peg. Paul Krugman showed that a credible target zone would make speculation stabilizing. In the 1990s, a number of emerging markets employed such regimes until they were swept away in crises. This spawned the bipolar view, which asserts that in a world of capital mobility, countries have to choose between firmly fixed and freely floating rates. The article concludes by arguing that even the most attenuated form of intermediate regime, the reference rate proposal, would carry advantages over a floating regime.