ABSTRACT
This chapter evaluates the relative merits of the two exchange rate and monetary-policy regimes to which most Latin American countries are converging today: hard pegs and floating exchange rate regimes. It covers the following topics: the cost and benefits of alternative regimes, elements to consider when choosing a rigid exchange rate regime, that is, dollarization, currency union or currency board, and the choice of monetary framework for the countries that decide to float, including an inflation-targeting (IT). In general, exchange rate regimes can be grouped into three broad categories: hard peg regimes (dollarization, currency unions and currency boards), intermediate regimes (fixed-but-adjustable pegs, flexible pegs, crawling pegs, target zones) and floating regimes (managed floats with occasional interventions and free floats). As Taylor emphasizes, more than the exchange rate, producers are particularly concerned about expected future exchange rate trajectories. The chapter discusses hard pegs are extreme cases of fixed pegs and, as such, they share the costs and benefits of such systems.
