Distinguished Lecture on Economics in Government—Exchange Rate Regimes: Is the Bipolar View Correct?

TLDR

The bipolar view claims intermediate regimes between hard pegs and floating are unsustainable, yet a wide range of flexible arrangements is still possible. The paper contends that proponents of the bipolar view have likely overstated their claim. The study finds that softly pegged rates are crisis‑prone and unsustainable for capital‑flow‑open countries, and that most nations’ monetary and exchange‑rate policies will react to rate movements.

Abstract

The bipolar or two-corner solution view of exchange rates is that intermediate policy regimes between hard pegs and floating are not sustainable. This paper argues that the proponents of the bipolar view have probably exaggerated their point. The right statement is that for countries open to international capital flows, softly pegged exchange rates are crisis-prone and not sustainable over long periods. However, a wide variety of flexible rate arrangements remains possible. Monetary and exchange rate policy in most countries should not and will not be indifferent to exchange rate movements.