Exchange Rates and Financial Fragility
Introduction If one positive thing can be said about the Asian crisis and subsequent discussions of how to strengthen the international financial architecture, it is that they breathed new life into a moribund debate on the consequences of exchange-rate arrangements. Curiously, early contributions to post-Asia literature about how to make the world a safer financial place said little about the choice of exchange rate regime, focusing instead on transparency, prudential supervision, policy toward capital flows, and IMF reform. 1 The emphasis in recent writings is different; there, the exchange rate has taken center stage. 2 In a sense, this shift reflects a maturation of the debate---a recognition that exchange-rate policy and the other items on the architects' agenda are connected. The exchange rate has an important influence on the volume capital flows. It is a key determinant of the response of local interest rates to global