In This Review

Too Sensational: On the Choice of Exchange Rate Regimes
Too Sensational: On the Choice of Exchange Rate Regimes
By W. Max Corden
MIT Press, 2002, 274 pp

Fixed but adjustable exchange-rate regimes have been at the core of some of the worst financial crises to hit emerging markets. Countries such as Mexico in 1994, South Korea in 1998, and Argentina in 2001 were hit by negative shocks from world markets. They then made matters worse by attempting to defend pegs against the dollar rather than devaluing and easing macroeconomic policy. In the process, governments often fell, much if not all of these countries' foreign exchange reserves were squandered, and eventually the local currency was devalued anyway. As a result, many macroeconomists have concluded that small, open economies -- meaning everyone but the United States, Japan, the members of the eurozone, and someday China -- should either join a full currency union with some anchor country or let their currencies freely float. Intermediate regimes, however, are thought to be doomed to failure. Corden, long a noted scholar of the interaction between exchange rates and real economic outcomes, explains this emerging consensus in his elegant book. Blending historical reference, simple logic, a little bit of graphical economics, and 12 excellent case studies, he makes the case that developing countries can best contend with lasting negative shocks by combining active fiscal policy with either fully fixed or floating exchange rates. Most compellingly, Corden conveys why the choice of exchange-rate regime matters to governments. One missing aspect: how politics influence who chooses exchange-rate regimes, and what choices are available.