Andean exchange-rate regimes, 1994-2003: a brief for "stable but flexible" regimes

Abstract

Recent analytical work has focused on exchange-rate regimes" and their general and specific consequences for growth and stability. Although significant progress has been made in formulating taxonomies of regimes, general consensus on which regimes are likely to prove optimal for given economies has proven elusive. In recent years, the five Andean economies have adapted a variety of exchange-rate regimes. Their experience appears to support the view that the most convenient exchange-rate regimes are those that afford policymakers sufficient freedom of maneuver to adjust their policies in response to evolving emphases on stability and growth objectives. That is, "intermediate", relatively flexible, regimes seem generally preferable to "polar" regimes that leave no scope for policy intervention. Bolivia and Peru, and more recently Colombia, have been able to secure a high degree of price-level and exchange-rate stability through disciplined monetary policy and exchange-rate management under flexible regimes. In Ecuador, dollarization has brought about price stability but aggravated competitiveness problems. Venezuela has had to adjust its fixed exchange rate repeatedly, although clearly this economy's difficulties go far beyond its exchange-rate regime. The different economies' different exchange-rate regimes have led to haphazard consequences for their bilateral trade relationships, and this appears to have significantly affected interregional trade."