The case for flexible exchange rates

TLDR

The author argues that achieving both convertibility and import liberalisation requires flexible exchange rates. The paper examines how flexible exchange rates can address balance‑of‑payments deficits, proposes combining them with stabilisation funds, and suggests a limited‑flexibility regime for early implementation. The author analyses various balance‑of‑payments adjustment methods, contrasts fixed‑rate alternatives, and demonstrates that a fluctuating‑rate policy is superior. JEL codes: E42, F31, F32.

Abstract

In the first part of the article the author shows that the double objective of the return to convertibility and the liberalisation of imports cannot be reached unless exchange rates are allowed to move. In the second and third parts he treats the longer run aspect of the problem, giving exhaustive analysis of possible methods of dealing with a deficit in the balance of payments. This is done first by discussing the disadvantages of the various alternative ways that may be adopted under the system of fixed exchange rates, and second by showing that a policy of fluctuating rates is superior to these methods. In the fourth part the suggestion for combining the policy of flexible rates with establishment of stabilisation funds is discussed. In concluding the author points to the possibility of adopting in the early stages a system of “limited flexibility” under which exchange rates would be allowed to fluctuate between limits that were well defined but considerably wider than those which prevail at present. JEL: E42, F31, F32