to adopt more pure forms of floating than the industrial countries have been able to sustain, especially when the conditions necessary for a successful pure float are less likely to be present in such economies. even this strategy will be uncomfortable, and is not guaranteed to succeed. large reserves and uncomfortable interest rates might be needed to mount an effective defence, and it will be tempting to mount this defence too early ( not to allow enough flex ). if a concrete example is needed to illustrate the point, singapore provides it. it was, arguably, the most successful country exposed to the full force of the crisis, with a managed exchange rate ( managed both in the sense of intervention and through well - designed active capital account policies ) ( see lee hsien loong ( 2000 ) ). back - up or support for the exchange rate regime what more could be done by emerging markets to enhance the possibility of a successful exchange rate regime? if we accept that one of the central factors presenting pressures on exchange rate regimes in emerging markets is large and volatile capital flows, then the obvious issue is whether measures can be taken to reduce the size and volatility of the flows. the first possibility here is capital controls. mere mention of this possibility creates deep rifts in the debate, with views strongly held and a fair bit of heat generated in the process. the process of transition ( financial deregulation ) is tricky and time - consuming. perhaps the common - sense way to approach this is to accept the possibility that chilean - style controls ( taxes on short - term inflows ) may be useful for some countries during the transition, but not too much should be expected of them ( see the conclusions on chile itself, which suggest that the controls managed to lengthen the maturity of the debt, without being able to prevent the exchange rate from appreciating during the phase of capital inflow ) ( see edwards ( 1998 ) ). 12 it may also be useful to adopt the techniques used successfully by singapore ( and now others ) to limit the ability of domestic banks to lend to foreigners in domestic currency, thus making it much harder for foreign speculators to take large short positions on the currency. other than these specific types of capital control, there are a set of issues which can be put in terms of prudential supervision, rather than capital controls. the sorts of prudential controls which might be used are to limit the opportunities for residents to borrow in foreign currency ( ie to prevent a repeat of the bangkok international

incentives which drive bank runs - the one - way bet which makes rational investors close out their position ahead of a possible collapse, and creates the incentive on the part of the authorities to defend the status quo to avoid triggering the run. the prescription seems easy, but these “ ends of the spectrum ” may not be comfortable or easy to maintain. only a limited number of countries will find the policy constraints of a currency board or the loss of sovereignty involved in dollarisation politically palatable. smaller countries with a suitable pegging partner may find this an acceptable and viable solution, but - leaving aside the special case of the euro - medium - sized countries will only be attracted to a hard fix if there are very compelling constraints on their choice, and they will find the degree of adaptation needed in the domestic economy can be painful indeed. where relative prices cannot change through exchange rate adjustment, domestic prices must adapt. 3 even super - flexible hong kong has found this hard, with gdp falls as large as korea ’ s during the asian crisis. argentina ’ s choice of a strong fix may well be correct policy, but it is clearly painful. 4 if the fixed end of the spectrum does not facilitate the sorts of adjustment which the underlying fundamental may require, then the free float end of the spectrum may well deliver much more variability than the fundamentals require. views on how a free float would work in practice have changed over the past thirty years, in the light of experience. early protagonists were confident that floating exchange rates would be stable and would reflect fundamentals. harry johnson ( 1973, p 208 ) assured us that : “ a freely flexible exchange rate would tend to remain constant so long as underlying economic conditions ( including government policies ) remain constant ; random deviations from the equilibrium level would be limited by the activities of speculators. ” 5 friedman ( 1953 ) believed : “ … instability of exchange rates is a symptom of instability in the underlying economic structure … a flexible exchange rate need not be an unstable exchange rate. if it is, it is primarily because there is underlying instability in the economic conditions … ’. in practice, the general experience might be summed up this way : friedman, arguing the case for floating, drew an analogy with daylight - saving time - it is easier to move to summer time than to co - ordinate everyone to move the time of their activities. those countries which adopted a fixed exchange rate in order to anchor prices in the face of persistent inflation usually found that this worked