Dreaming of overcoming the 'impossible trinity': towards a long-term 'optimal' real exchange rate for assuring economic development

Abstract

Well documented in economic literature, the choice between alternative exchange rate regimes involves a trade-off between the advantages of a fixed exchange rate and a floating exchange rate regime. The former warrants the stability of the nominal exchange rate, an important condition for economies with a long tradition of high inflation. However, this benefit has a cost: the monetary policy’s loss of autonomy. Also, international experience in the 1990s had shown that emerging countries that adopted an administered exchange rate regime and no capital control were vulnerable to speculative attacks on their currencies. These days, most of the emerging countries adopt a floating exchange rate regime.