Financial Turmoil and Choice of Exchange Rate Regime

Financial turmoil is becoming a fact of life in Latin America. The 1990s have been characterized by enormous volatility in the magnitude and cost of capital flows. The correlation of capital swings across disparate countries suggests that the quality of emerging market policies in addition to global factors have been the main actors in this drama. Therefore, the blame for financial turmoil has moved away from inappropriate domestic policies. Instead, the paradigm has shifted to one of determining which policies ¾ domestic or international¾ are most effective in taming the destabilizing effects of inherently volatile capital flows.