This paper argues that avoidance of economic and financial crises requires that the values of national currencies maintain such real values as to be consistent with the underlying economic fundamentals. The nominal values of the currencies should therefore adjust spontaneously in response to changes in nominal values to preserve the underlying needed real values. When the fundamentals require a change in the real exchange rate, a mechanism for adjustment has to be in place. This paper recommends adopting a monetary anchor in terms of stable purchasing power vis-a-vis a comprehensive basket of world output, and introducing a crawling peg mechanism vis-a-vis this anchor.
ISBN of the source publication: 9789627365013
An early version of this paper was presented at the PECC Trade Policy Forum conference in Lima, May 17-19, 2000, and then at the Western Economic Association Conference in Seattle, June 29-July 3, 2002.