Why Should Developing Countries Adopt Flexible Exchange Rates Regime: A Review

In this review, I summarize why developing countries should adopt a flexible exchange rate regime by casting doubt on the effectiveness of a fixed exchange rate regime for such countries. In section 1, I analyse the reasons underlying the choice for exchange rate regimes from both economic and political perspectives. In section 2, I highlight the pitfalls of fixed exchange rate regimes in developing countries by considering the case of Southeast Asian countries and Argentina in the late ninties. In the last section, I focus on the advantages of a flexible exchange rate regime as both an external shock absorber and a catalyst for economic growth: By comparing the west and central african countries that make up the CFA zone to their sub-Saharan peers, I argue that GDP growth has been hindered by a fixed regime. My conclusion is that developing countries can largely benefit from adopting a flexible exchange rate regime: This would absorb external shocks, lead to a rapid economic growth and avoid the cross-rate fluctuations, which are catastrophic for trade.