Whither the Emerging Markets' Currencies?

Abstract

The authors look into the fiscal and monetary options available to the governments of emerging countries to manage both their economies and their currencies. Having first observed that Argentina's government has struggled to sell its T-bills to a largely captive domestic debt market, that the Brazilian real is down more than 20% since January, and that, in the rest of the world, there is doubt about Asia's economic prospects and Turkey's commitment to reform, they suggest that, taken together, these events raise the prospect of financial contagion spreading across the emerging markets and that the root of many problems can be traced to the organization of these countries' monetary system. Describing and evaluating the consequences of currency policies centered on devaluation, pegging the home currency to an external yardstick or to currency boards, they offer an intriguing analysis concluding that emerging markets would avoid the speculative attacks related to capital outflows if they did not have a central bank and adopted some other country's monetary policy.