ABSTRACT
Liberalizing countries have experimented with a variety of exchange-rate regimes: managed floats with more or less intervention, soft pegs, hard pegs, crawling pegs, and currency boards. In this chapter, the author focuses on two of these questions. First, how effective is sterilized intervention—that is, intervention which is not allowed to affect the domestic money stock—in achieving exchange rate targets. Second, how useful are exchange-rate targets based on Purchasing Power Parity calculations. The author provides an overview of the policy issues and discusses the effects of sterilized intervention in exchange markets. He evaluates the possibility of using purchasing power parity as a guide for exchange-market policies. Since the current period of managed floating began in mid-March 1973, many observers have reported that fluctuations in actual real exchange rates do not appear to tend to revert back to long-run equilibrium levels.
