Participants address exchange rate and financial vulnerability in emerging markets

• Author: Gary O’Callaghan
• Position: IMF Resident Representative, Croatia
• Pages: 269-270

Page 269

In a world of freely flowing capital, volatility, and fluctuating exchange rates, emerging markets are particularly vulnerable to external and internal financial shocks. At the sixth annual Dubrovnik Economic Conference, held in late June, experts from academia, multilateral financial institutions, governments, and capital markets met to share their thoughts on and experience with the ability of exchange rate regimes to withstand these shocks. The two-day gathering was sponsored, for the sixth consecutive year, by the Croatian National Bank and organized by Marko Ȉ Skreb, Governor of the Croatian National Bank, and Mario I. Blejer, Senior Advisor in the IMF’s Asia and Pacific Department. Participants explored a range of policy options and their implications.

Exchange rate policy choices

Last year’s Nobel economics laureate Robert Mundell of Columbia University set the global tone for the conference by envisaging a world with three coordinated and stable currency zones. Emerging markets in each zone would link their currencies to the relevant lead currency, thereby transferring global stability to domestic markets. Such a system would help diminish room for speculative attacks, but countries would still need to meet the policy requirements of domestic stability. Jacob Frenkel of Merrill Lynch doubted the viability of global currency blocs and stressed that emerging markets would still need to overcome institutional weakness and persistent exposure to external shocks with constant vigilance and sound domestic policies.

Focusing on the transition economies of Eastern Europe, Mario Nuti of the London Business School listed the costs and benefits associated with adopting the euro, warning that the advantages associated with lower transaction costs and economic integration should be weighed against the disadvantages of having no lender of last resort and of possible incompatibility with long-term exchange rate and monetary policy requirements. Potential euro-area members were being encouraged to pursue the monetary convergence measures embodied in the Maastricht Treaty, but many hidden problems lay in quasi-fiscal deficits and on bank balance sheets. Real economic convergence remains elusive, added Grzegorz Kolodko, Poland’s former finance minister.

Jacek Rostowski of the Central European University in Budapest (presenting a...