Front Matter

Front Matter

Rupa Duttagupta, Cem Karacadag, and Gilda Fernandez
Published Date:
January 2006
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The IMF launched the Economic Issues series in 1996 to make the IMF staff’s research findings accessible to the public. Economic Issues are short, nontechnical monographs on topical issues written for the nonspecialist reader. They are published in six languages—English, Arabic, Chinese, French, Russian, and Spanish. Economic Issues reflect the opinions of their authors, which are not necessarily those of the IMF’s Executive Board or management.

© 2005 International Monetary Fund

Series editor

Asimina Caminis

IMF External Relations Department

Cover design and composition

Massoud Etemadi and Choon Lee

IMF Multimedia Services Division

ISBN 9781589064768

ISSN 1020-5098

Published December 2005

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A fixed exchange rate, which pegs the value of a currency to a strong foreign currency like the dollar or the euro, has many advantages, particularly for developing countries seeking to build confidence in their economic policies. And such pegs have been associated with lower inflation rates. However, countries with fixed exchange rates seem to be more vulnerable to currency crises, as well as to twin currency and banking crises, than those with more flexible regimes. Indeed, as economies mature and become more closely tied with international financial markets, the benefits of exchange rate flexibility appear to increase.

Although many countries still have fixed or other forms of pegged exchange rate regimes, a growing number—including Brazil, Chile, Israel, and Poland—have adopted more flexible regimes over the past decade. The trend toward greater exchange rate flexibility is likely to continue as deepening cross-border linkages increase the exposure of countries with pegged regimes to volatile capital flows because flexible regimes offer better protection against external shocks as well as greater monetary policy independence.

Regardless of whether flexible exchange rate regimes are adopted under stress or under orderly conditions, their success depends on the effective management of a number of institutional and operational issues. These issues are summarized in this Economic Issue, which was prepared by David Cheney, based on IMF Working Paper 04/126, “From Fixed to Float: Operational Aspects of Moving Toward Exchange Rate Flexibility,” by Rupa Duttagupta, Gilda Fernandez, and Cem Karacadag. The working paper is available free of charge on the IMF’s website, at A subsequent paper by the same title submitted by the IMF’s Monetary and Financial Systems Department to the IMF’s Executive Board in November 2004 is also available on the IMF’s website, at

Two earlier Economic Issues on exchange rates—Economic Issue No. 2, Does the Exchange Rate Regime Matter for Inflation and Growth? by Atish R. Ghosh, Anne-Marie Gulde, Jonathan D. Ostry, and Holger C. Wolf (1996), and Economic Issue No. 13, Fixed or Flexible? Getting the Exchange Rate Right in the 1990s, by Francesco Caramazza and Jahangir Aziz (1998)—are available free of charge at

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