First draft: January 12, 2000
This draft: September 25, 2000
Fear of Floating
Guillermo A. Calvo
University of Maryland and NBER
Carmen M. Reinhart*
University of Maryland and NBER
Abstract
In recent years, many countries have suffered severe financial crises, producing a staggering toll
on their economies, particularly in emerging markets. One view blames fixed exchange rates--
“soft pegs”--for these meltdowns. Adherents to that view advise countries to allow their
currency to float. We analyze the behavior of exchange rates, reserves, the monetary aggregates,
interest rates, and commodity prices across 154 exchange rate arrangements to assess whether
“official labels” provide an adequate representation of actual country practice. We find that,
countries that say they allow their exchange rate to float mostly do not--there seems to be an
epidemic case of “fear of floating.” Since countries that are classified as having a free or a
managed float mostly resemble noncredible pegs--the so-called “demise of fixed exchange rates”
is a myth--the fear of floating is pervasive, even among some of the developed countries. We
present an analytical framework that helps to understand why there is fear of floating.
JEL Classification: F31, F33, F41
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*The authors wish to thank Enrique Mendoza, Vincent Reinhart, Carlos Végh and seminar
participants at the Hoover Institution conference on “Currency Unions,” Stanford, California,
Summer Camp, Paracas, Peru, International Monetary Fund and the NBER’s Summer Institute
2000 in International Finance and Macroeconomics for very useful discussions and Ioannis
Tokatlidis for superb research assistance.
1 See, for example, Goldstein, (1999).
2 The textbook definit ...